I keep reading through Rabbi Michael Lerner’s Tikkun, Jim Wallis’ Sojourners, and the parallel writings of the far Catholic left, and I fail to pick up much hankering for the old essential characteristics of socialism: the abolition of private property, the government-managed economy, and at least the pretense of economic equality. Even the soft versions of Christian socialism that Reinhold Niebuhr once cared about have disappeared, like old books and faded drapery put out of sight, upstairs in the attic.
Still, the general flirtation with anti-capitalism seems not to have lost its attractions. It has always infected aristocrats and artists—all the better sorts of people. The ever-ready slogan “The rich are getting richer, the poor are getting poorer” still has some power to stir the jaded indignation.
Even when the facts run to the contrary. As when one reads behind the statistics that are bandied about in newspapers and magazines. If you recall that income, as the federal government counts it, consists mainly of earnings from work, you will probably be able to think very quickly of quite a number of poor persons in your family or your immediate circle of acquaintances.
I remember my children filing income tax returns in college days while earning substantially below the poverty line in each of those years. Quite a few graduate students with two children are also below the federal poverty line; even if their spouse works at least part-time, they are still below it or not very far above it.
Then there were my mother and my wife’s mother, widows whose yearly earnings consisted mostly of investment income, plus a source of cash that doesn’t show up in poverty statistics: social security. Both owned their homes outright—no mortgages to pay, just taxes and utilities. Medicare covered medical expenses, which also is not counted as income by the feds. So both of our mothers and three of our children (at least in those years) counted as poor.
I have also met retired professors whose income stream has stopped except for social security and pensions (some of these more ample, some rather small). But they, too, own a little farm not too far from campus, debt-free. They live very comfortably but still show up as poor, or very nearly so. One can have modest wealth and still live cash-poor.
Think of the growing proportion of widows in the United States (since males die younger than their mates). Think of the several million women with children, no husband present, about half of whom do not have a job. These two categories of women alone make up a very large percentage of all the nation’s poor.
In all these cases, improved employment figures and a booming economy do not much affect the income of the poor, since nearly all of them are no longer participating in the workforce. Meanwhile, subsidies from government do not count in the federal poverty statistics. Even if all the subsidies together lift a person above the poverty line, officially that person still counts as poor.
There is one other wrinkle in the poverty numbers worth ironing out. In the lowest 20 percent of the population by income—the bottom quintile—about a third are above the poverty line. And all those in the bottom 20 percent are exempted from federal income taxes—and so are all those in the next higher quintile, too. The lowest 40 percent of income earners are exempted from federal income taxes.
Here those on the left always scream in rebuttal: “Yes, but they are still paying social security taxes (payroll taxes).” True, but these are only deferred earnings, returned to the payer after age sixty-five. The social security tax is a kind of enforced savings. Unless the earner dies too young to receive benefits later, he will receive more than he put into it.
By the way, the top quintile of income earners paid 44 percent of all payroll taxes in 2004 (the last year of reporting). In other words, quite a bit more than their share. And quite a bit more than the lowest quintile. The top 20 percent also paid 85.3 percent of all federal income taxes. Our tax system, say what people will, is highly progressive.
The fact that our tax system is progressive also shows up in the fact that, in 2004, the bottom quintile received 34 percent of all federal spending, well more than their share. The second quintile received almost exactly its share, 22 percent. The other three quintiles received less than their share: 16 percent for the middle quintile, 13 percent for the fourth quintile, and 15 percent for the top quintile.
Since most income taxes are paid by the top quintile—more than 85 percent—nearly all arguments about tax rates are arguments about which portions of the top 20 percent are going to pay a slightly higher part of the burden. It is a matter of adjusting the weights on the top twenty (out of a hundred) pairs of shoulders.
Despite the fact that the bottom four quintiles—80 percent of all earners—pay only 14.7 percent of the income taxes, any deduction of a few hundred dollars per year in the tax burden of each of them is much appreciated and quickly used. Still, any adjustments in this huge 80 percent base do not much affect the income flowing into the IRS.
In April 2007, the IRS received more tax dollars than in any month in its prior history. The new tax policies of the last few years are soaking the rich heavier than they have ever been soaked before. The rich are paying a larger percentage of the income tax than ever before (85 percent in 2004, compared to 65 percent in 1979). They are also paying higher amounts of raw dollars each year—but they have not been complaining.
Perhaps you have felt it in your own experience. If offered a thousand dollars for a freelance job, when the federal and state taxes were going to take $550 or more in taxes, it didn’t hurt much not to undertake the travel and the fuss. But when the government takes only $300 and leaves you $700, it feels like an obligation to your family, kids, and grandkids to accept it. Incentives affect decisions.
Since tax rates are lower than before, the rich gladly pay larger amounts of tax dollars at lower rates, than paying fewer dollars at higher rates. They hate the disincentives of the higher rates. The low rates make paying taxes hurt less. Meanwhile, lower tax rates also encourage fresh investment, to create even greater wealth (and later to pay even more dollars in taxes).
This seems to me a win-win-win outcome. The government gets higher and higher revenues; the rich pay higher and higher amounts of tax dollars; and the standards of living of the poor rise more quickly, as their rising percent of all federal spending—two years ago, 34 percent—brings in an ever more plentiful stream of actual dollars.
It seems to me that an economic system that works like this is far better than any prior economic system in history, whether landowning, agricultural, traditional, or early industrial—let alone the Mickey Mouse socialist systems of Eastern Europe and China. Whatever its faults, the American economy has proved itself capable of absorbing about ten million new immigrants every decade, nearly all of them poor, and helping them to rise out of poverty by themselves within ten years.
In fact, close study shows that if any American does the following three things—works even at a minimum wage all year round, stays married (even if not on the first try), and finishes high school—his or her chances of being poor are only 7 percent. He or she has a 93 percent chance of moving out of poverty fairly quickly. The vast majority of individuals at the bottom sure keep doing that, decade by decade. The actual population at the bottom keeps changing and churning.
Most of our poor do not stay poor. Most stride upward through the various quintiles decade by decade.
If you think about this concretely, I bet you can see how this has been happening through the history of your own family and those of childhood associates.
It really is not necessary, you know, to be anti-capitalist. That is just a tic from times past.
Michael Novak has been a member of the First Things board since its founding and was the winner of the Templeton Prize in 1994. He has held the George Frederick Jewett Chair at the American Enterprise Institute since 1980. His recent articles and pathways to his books can be found at www.michaelnovak.net. The figures in the text derive from the Congressional Budget Office, and a syndicated article by Bruce Bartlett (April 25) helped to interpret them.