By James Surowiecki
The fight on Capitol Hill over whether to extend the Bush tax cuts is about many things: deficit reduction economic stimulus supply-side ideology. But at its core is a simple question: who counts as rich?
The Obama Administrations answer is that youre rich if you make more than two hundred thousand dollars a year as an individual or two hundred and fifty thousand dollars a year as a household and therefore you should have your taxes raised. Conservatives suggest that this threshold is far too low and argue that Obama would be taxing mostly small-business owners or the people a Fox News host has referred to as the so-called rich" rather than fat plutocrats.
You might think this isnt really much of a debate. An annual income of two hundred and fifty thousand dollars puts you in the top three per cent of American households and is more than four times the national median. Youre rich and a small tax increase isnt going to rock your world.
Good luck convincing people of this though. Judging from surveys of how Americans describe themselves most of the privileged dont feel all that privileged. Why is that? One reason is the American mythology of middle-classness. Another is geography: in a place like Manhattan where the average apartment sells for nine hundred thousand dollars your money doesnt go as far. And then theres a larger truth about how wealth is getting concentrated in this country. As the economists Thomas Piketty and Emmanuel Saez have documented people who earn a few hundred thousand dollars a year have done much worse than people at the very top of the ladder.
Between 2002 and 2007 for instance the bottom ninety-nine per cent of incomes grew 1.3 per cent a year in real termswhile the incomes of the top one per cent grew ten per cent a year. That one per cent accounted for two-thirds of all income growth in those years. People in the ninety-fifth to the ninety-ninth percentiles of income have represented a fairly constant share of the national income for twenty-five years now. But in that period the top one per cent has seen its share of national income double; in 2007 it captured twenty-three per cent of the nations total income. Even within the top one per cent income is getting more concentrated: the top 0.1 per cent of earners have seen their share of national income triple over the same period. All by themselves they now earn as much as the bottom hundred and twenty million people. So at the same time that the rich have been pulling away from the middle class the very rich have been pulling away from the pretty rich and the very very rich have been pulling away from the very rich.
The current debate over taxes takes none of this into account. At the moment we have a system of tax brackets well suited to nineteenth-century New Zealand. Our system sets the top bracket at three hundred and seventy-five thousand dollars with a tax rate of thirty-five per cent. (People in the second-highest bracket starting at a hundred and seventy-two thousand dollars for individuals pay thirty-three per cent.) This means that someone making two hundred thousand dollars a year and someone making two hundred million dollars a year pay at similar tax rates. LeBron James and LeBron Jamess dentist: same difference.
This makes no sensetheres a yawning chasm between the professional and the plutocratic classes and the tax system should reflect that. A better tax system would have more brackets so that the super-rich pay higher rates. (The most obvious bracket to add would be a higher rate at a million dollars a year but theres no reason to stop there.) This would make the system fairer since it would reflect the real stratification among high-income earners. A few extra brackets at the top could also bring in tens of billions of dollars in additional revenue.
There would be political advantages too: the reform could actually make tax hikes on top earners more popular. Critics like to describe tax hikes as hurting small business because small-business owners make up a sizable percentage of people in the top two brackets and because small-business owners unlike Wall Street traders are popular on Main Street. It would be harder to mount a defense of millionaires which may be why this year a Quinnipiac poll found overwhelming support even among Republicans for a millionaire tax.
The explosion in wealth at the very top of the pyramid has given rise to what the commentator Matt Miller has called a lower upper class"doctors lawyers accountants even some journalists who make very good livings but enjoy nothing like the rewards that come to their peers in finance or in the executive suite. The lower upper class exerts a cultural influence out of proportion to its size and so its anger toward the upper upper classtoward outrageous executive salaries and Wall Street shenaniganscould be a powerful force for reforming the way we deal with inequality.
This is one case where simpler isnt better. In a society thats becoming more stratified a sensible tax system should draw more distinctions not fewer. The U.S. is now a place where the rich and the ultra-rich really inhabit different worlds. (A couple of years ago Barrons declared Yes it takes more than $10 million to be seen as rich these days.") They should probably inhabit different tax brackets too. ♦
