“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years. “
— Alexander Fraser Tytler, Lord Woodhouselee
The only way to solve the deficit problem is for Republicans and Democrats to reach a compromise over spending cuts and tax increases. That said, the President and his party seem to be resorting to the traditional class warfare tactics of the past to win votes.
As such, it is important to take a look at the numbers to get a sense of which constituencies currently bear the majority of the tax burden. To be fair, this analysis only looks at income taxes, so it leaves out much of the wealth that private equity barons made from dividends on carried interest payments, etc.. Nonetheless, the IRS data shows some interesting trends.
First, the top 1%, 5%, and 10% of tax filers have been assuming an increasing percentage of the United States’ overall income tax burden, while the tax burden of the bottom 50% has steadily declined. For instance, in 1986 the top 10% of income earners paid over 54% of income taxes. By 2008, that share increased by 15 percentage points to over 69%. In contrast, the bottom 50% of wage earners paid a little under 7% of income taxes in 1986. By 2008, that share decreased to under 3%.
The common rebuttal to the fact that the top 10% pays nearly 70% of income taxes is that the rich have become much richer in recent decades, while the poor have gotten poorer. The data seem to indicate this contention is indeed true. For instance, the top 10% of income earners accounted for 39.1% of the nation’s total reported income in 1986, but 47.6% of it in 2008. The bottom 50% accounted for 15.5% in 1986, but 12.5% in 2008.
However, while the bottom 50%’s share of the income tax burden declined by 3.8 percentage points, its share of income only declined by 3 percentage points. In contrast, the top 10%’s share of the income taxes increased by 15 percentage points, while its share of income only increased by 8.4 percentage points.
To be fair, tax rates for top earners have come down from historical levels, and a tax increase of some sort will be necessary for the country to resolve its budgetary problems. A simplification of the tax code that both reduces rates and increases revenue would even be better.
That said, when a decreasing number of individuals fund the lion’s share of services for a growing population of people who provide very little to the treasury, government creates a ravenous beast that becomes increasingly very difficult to feed.
Soon (if not now), a situation will exist, in which the majority of the population can vote for programs that they share no burden in funding. Once a majority of the population learns that it can vote itself funds from the public treasury, the collapse of the system as we know it is sure to follow.
Very well said. The “apocalyptic” messages are all over TV should we vote Republican or not allow the debt ceiling to be raised.
I enjoyed this article over on investors.com.
It’s a bit ridiculous to claim the world will end if one votes Republican. However, I would still recommend raising the debt ceiling as the alternative is defaulting on U.S. debt.
Ask Argentina how that’s going…
Another way to look at this is to see the falling apart of the middle class and the growth of a larger lower class. Consider: the bottom share had their income actually decline, while the top share had their income increase. That means that the wealthy have seen an increase in income while the poorer have seen a decrease. The fear I have is that we’re becoming a country where there isn’t true opportunity. Yes, true talent and work can succeed but more and more people find even working hard not to be enough. The fact everyone’s income rose, especially the top 1 and 10%, while half the country saw a decrease in income is troubling.
That is a problem taxation can’t solve of course — transfers can create dependencies instead of opportunities. I think this goes hand in hand with our loss of productive capacity (we consume more than we produce) and is a rather scary trend. I’m not sure how to solve it, but neither tax cuts nor more social welfare programs are the answer!
All of this stuff is very disturbing. And it is because of the complex interplay of many factors. Keeping interest rates low in the early 2000s helped create the bubble as well as the encouragement of home ownership for folks who could not financially support themselves. Then you have the self-selection of students at elite universities where smart people are having their children with other smart people, in effect deepening their differences from the other have-nots of society. Then you have a wealthier class that increasingly support a larger, lower class. A lot of things are simply out of balance and who knows how to restore it. Very scary times indeed…
social welfare programs have not done one thing to lift the lower income folks out of poverty or provide them opportunity…since Johnson’s Great Society…in nearly 60 years of this, things have gotten worse…people are not motivated to provide for themselves when the government is handing it out. And, this class is growing and there is nothing anyone can do about it unless the handouts STOP!
The problem is that the Democratic Party has a perverse incentive to keep this population large and happy, because these groups help them win elections.
I don’t think the Democrats do this out of a desire to win elections. These people don’t vote! The people who vote are those who pay taxes and work. I think the problem is that the Democrats have, with good intention, too often chosen the wrong solution to the problem of poverty and inequality. If you give aid and transfers that can create a dependent relationship where the goal of the lower class is just to get as much from the government as possible. The goal has to be to invest in a way that encourages innovation, hard work, and improving ones’ situation.
I don’t think the Republican focus on the market is the answer either. The wealthy can structure the game in their favor. Neither party really has come up with a way to actually help people help themselves. That’s what we need to do.
I agree that neither party is perfect. As I’ve mentioned onthe past, I think one helpful step would be to simplify the tax code. That way rates come down, but revenues go up.