Concentrated Wealth & Taxes

As the new year gets under way, it’s time to visit everyone’s second favorite topic after death: taxes. Conservative commentators and politicians have pointed to a disturbing trend in the past two decades: the increasingly smaller percentage of taxpayers paying an ever increasing share of income taxes in the U.S.

The Tax Foundation reviewed a mid-year IRS report on income and taxes. In 1980, the top 1% of income earners paid about 20% of total personal income taxes. In 2007, that same top 1% paid 40% of the tax bill. (Table 6) It is a concern when the tax burden is shared disproportionately by a small percentage of the population. A dangerous trend is that the bottom half of income earners pay almost nothing in income taxes. Why the danger? An ever increasing number of taxpayers who pay little in taxes will be more likely to vote for more government spending and more entitlements. Why not? It doesn’t cost them anything.

As valid as those concerns are, there is an equally alarming increase in the disparity of incomes. In 1980, the top 1% of earners in the U.S. reported 8.5% of the total income (AGI). In 2007, almost thirty years later, that top 1% reported almost 23% of total income. (Table 5) That three-fold increase in the proportion of income earned by the top 1% is overshadowed by another startling statistic in the IRS income tables: that the top 5% earned 60% of the total income in this country in 2007.

The increasing concentration of wealth in any country has been a harbinger of a downfall in a dominant economy. In “Wealth And Democracy” Kevin Phillips examined the history of the financial empires of Spain, Holland and England, which all lost their economic dominance as the wealth concentrated in the hands of the few. The U.S. is on the same path as those previous dominant economies. Will history repeat itself? Probably.

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