The Paradox of Taxes and Wealth In the United States

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Although higher income-earners pay the majority of taxes in the U.S., decreases over the years have contributed to income inequality. Credit: By Guest2625

One of the fun things about flipping between Fox News and MSNBC is that once you get past the respective base-pandering lead stories about Obamacare and ‘Bridgegate,’ the remaining pieces tend to be about essentially the same issues,  viewed from polar-opposite vantage points.

Each side is as convinced it is correct as it is certain the other is not, serving as a media microcosm of our divided society in general.

One subject which has repeatedly made the rounds of both networks in recent weeks and months is that of income inequality in the United States. I’ve dedicated several pieces to it, including both a right-leaning take as well as a more left-leaning perspective. As a political independent, I’m allowed to paint both sides of the same fence.

One of the debates about income inequality is whether or not the there truly are, as Congressman Paul Ryan has said, ‘makers’ and ‘takers.’ Although the entirety of that subject is far too complex to tackle in one article, it does bring up a fundamental, paradoxical question: Who foots the tax bill for government programs and services in the United States?

The Rich Get Richer — And Pay All the Taxes, Too

It is a statistical fact that upper-income Americans have, on balance, done far better than the rest of U.S. households over the past 30 years. As I’ve written previously, the top ten percent have enjoyed increases from 33.2% of overall wealth in 1982 to 48.2% in 2012. This means the remaining classes have, by definition, absorbed losses of an identical percentage. Based upon the data, there is no question that the rich have indeed gotten richer, and as a result, income inequality has risen dramatically in the United States.

Having said that, the Congressional Budget Office issued a report last December which stated something both stunning and yet intuitive at the same time: the top 40% of wage earners pay 106% of U.S. personal income taxes.

How is this possible?

60% of Americans pay negative taxes

All income-earners who file tax returns are subject to paying taxes.

In 2013, the lowest income tax bracket was 10%, up to the first $17,850 of taxable income. Taxes rates were progressively higher beyond that, capping at 39.6% of income above $450,000 for married taxpayers. Given the tax brackets, married taxpayers with taxable income of $150,000 would have paid roughly $30,000.

Although all income-earners pay taxes, the CBO report nets out the amounts each income class pays against the receipt of government subsidies and other benefits. As an example, the CBO cites the lowest-earning class as making an average of $8,100 in 2010, but receiving approximately $25,000 in government benefits. By comparison, the taxpayers making $150,000 would have paid $30,000 while likely availing themselves of no government benefits. Obviously, there are a myriad of points in between (as well as above), but the examples show exactly how 40% of taxpayers can foot the bill for more than 100% of tax receipts.

In short, lower-income earners receive a net surplus between payments and benefits, while the upper-income earners experience a negative transfer of wealth. However, since the latter group’s income is so much higher, they experience the paradox of higher taxes and increasing personal wealth first hand.

The Social Safety Net Forces a Wealth Transfer

As much as income inequality has become a political football, the U.S. has a massive social safety net currently in place. The U.S. Budget analysts estimate 37.1% of overall federal spending in FY 2014 is in the areas of health care and welfare, up from 33% just five years earlier. This trend is unsustainable without significant economic growth, cuts in discretionary spending, reductions in entitlements, increased taxes or some combination of all of the above.

With economic growth at a pace below that of previous economic recoveries, the debate has devolved into arguments over increasing taxes (or as some prefer to term it, ‘revenues’) versus decreasing expenses. A tangential argument has erupted in some factions around whether we should employ austerity, or just control the rate of increase of discretionary expenditures.

Given that the social safety net is growing larger every year and is rising at a pace faster than economic growth, it becomes clear that no matter how the budget battles end up being resolved, funding for entitlements must come from taxes paid by higher-income Americans and businesses.

The Paradox of Taxes and Wealth Continues to Grow

Winston Churchill once characterized Russia as “A Riddle Wrapped In a Mystery, Inside an Enigma.” Such is the state of flux between taxes, discretionary spending and income inequality in the United States. Not only are there no easy answers, but the right and the left can’t even agree on which questions to ask. All one needs to do is turn on Fox News and MSNBC for confirmation of that fact.

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