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Closing income gap comes at a high price

Much has been made of what’s described as a widening income gap in the United States between the poor and rich and what the federal government can

— or should — do to narrow that gap.

The results of a recent study confirm the federal government is already doing a lot in redistributing money from those in the top income brackets to those in the bottom brackets. The study also quantifies the trillions of additional dollars that would have to be shifted to fully close the gap.

The Tax Foundation, a nonpartisan research group based in Washington, D.C., examined what 150 million U.S. families pay in taxes and what they get back in spending on everything from national defense to transfer programs. Given a progressive system that imposes higher taxes on higher earings, the results aren’t particularly surprising.

A typical family in the lowest fifth of earnings has an average market income of $9,560 and receives $21,158 more in spending than it pays in taxes.

In contrast, a family in the highest fifth earns an average income of $311,400 and pays $65,575 more in taxes than it receives in spending. Meanwhile, families in the middle earn an average of $56,885 and receive $7,376 more in spending than they pay in taxes.

Collectively, the federal government redistributes $1.5 trillion a year from the top 40 percent of Americans to the bottom 60 percent under current tax and spending policies. State and local governments redistribute another $500 billion. Those results don’t include the latest increase in the top marginal tax rate from

35 percent to 39.6 percent or subsidies implemented under federal health care legislation.

The Tax Foundation study calculated that to guarantee that everyone in America earns an average income, the federal government would have to take an additional $2.4 trillion from families in the top 40 percent. Families in the lowest fifth would receive another $50,882 in federal transfers. Families in the highest fifth would have to pay an another $164,227 in taxes.

For those families in the top fifth of earnings, the proportion of their income that’s redistributed would increase from 21 percent to 74 percent.

It’s true the rich in the United States don’t pay their fair share — they pay far more than their fair share proportional to their incomes. But that share would grow substantially larger under government policies that would increase the redistribution.

What the Tax Foundation study doesn’t take into account is the ramifications of an additional redistribution on the United States economy or the effects of progressive taxes on the businesses many of those in the upper income brackets own and operate. At what point does the burden of additional taxes outweigh the benefits of the additional work required to increase profitability? How many more people could business owners hire if their taxes were a little lower?

Rather than focus on income equality, the government should concentrate its efforts on assuring opportunity equality. Everyone should have the same chance to compete on a playing field made level.

Given the choice, most people would far rather earn success than receive government compensation.

The Business Times has served as the definitive source for Grand Junction business news since 1994. The journal offers news, views and advice you can use twice each month in print with daily updates online at www.TheBusinessTimes.com
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Posted by on Feb 19 2014. Filed under Editorials, Opinion. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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