The False Link: Income Inequality and Low Taxes

Friday, 05 Apr 2013 08:03 AM

By Jacob Wolinsky

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In an earlier post, I stated that President Barack Obama’s desire to raise taxes is for reasons of fairness not for economic reasons. A colleague agreed that Obama’s language seemed punitive, but thought that the reasoning was good. He noted that raising taxes for the rich reduces income inequality. With the rise of populist groups like Occupy Wall Street, there has been an effort to separate the ‘1 percent’ of Americans from the other ‘99 percent.’

I knew that my colleague had some data to back him up. There are different ways to calculate income inequality. However, a common one is the annual U.S. income share of the top income earners, well use the now famous 1 percent.

The argument goes that President Ronald Reagan gave a massive tax cut to the rich in 1981, which started this trend. From 1981 to 2007 the annual income share for the 1 percent went from 10 percent to 23.5 percent, according to a study from University of California, Berkeley.

In 1993, President Bill Clinton raised taxes in an effort to reduce the deficit. The move raised taxes on the wealthiest 1.2 percent of taxpayers, while also cutting taxes on over 15 million low-income earners. What happened? Not only did income inequality increase, it skyrocketed. In fact, income inequality started to increase when President George H.W. Bush increased taxes.

President John F. Kennedy drastically cut taxes for the top income earners. Income inequality did not increase, but remained mostly stagnant for over 15 years until around 1980. Liberal propagandists like to start measuring income inequality starting from around 1980. Why? Because they can claim a false link between lowering taxes for the rich and rising income inequality.

However, starting from 1964, there were 16 years when taxes were slashed, and inequality stayed the same, and 10 years, from 1990 to 2000, when taxes increased and so did inequality. That means from 1964 to 2008 (44 years), the link between taxes and inequality was proven false for 26 of those years.

Clearly, this is a complex issue, but it seems unlikely that milking the rich is the sole answer to income inequality.

Why did the trend start in 1980? That is the same time period in which U.S. manufacturing started to decline. The rich started to produce cheap clothing in China and sell it at a premium in America. This trend accelerated in the 1990s and 2000s, as China joined the World Trade Organization and started to become a world player.

Why does Obama so badly want to raise taxes on anyone making over $250,000? It could be punitive, as discussed in a previous column, it could be another reason, but it certainly has nothing to do with inequality.

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