Part of the reason these top taxpayers --- professor Joel Slemrod of the University of Michigan calls them the "Fortunate 400" -- did so well in 2007 is because they faced a relatively low tax burden. Even though
the top tax rate in 2007 was 35 percent and applied to taxable income above roughly $350,000, none of the top 400 taxpayers actually paid that rate. Most of the income of these 400 households was in the form of capital gains and dividends, which are taxed at a preferential 15 percent rate, rather than the 35 percent that applies to ordinary "sweat" income. Thus, although these 400 taxpayers paid more than $22 billion in income taxes, t
heir average tax rate was just 16 percent in 2007. This rate is nearly 10 percentage points lower than it was in 1992, when the IRS began collecting these data.
But what about the oft-heard argument that cutting taxes stimulates growth -- that putting money back in the hands of the wealthy in fact raises everyone's economic boat because the wealthy create demand for goods, and therefore, create more jobs as well?
Well, it's time to examine some of those assumptions.
In particular, as the
Center on Budget and Policy Priorities reported, the top 1 percent of households held a larger share of income in 2007
than at any time since 1928. Moreover, just after these households earned those record amounts, the U.S. economy fell into its worst economic downturn since the Great Depression. Real economic growth slowed from 2.1 percent growth in 2007 to just 0.4 percent in 2008 and fell by 2.4 percent, or by $324 billion, in 2009. Meanwhile,
unemployment rose by more than 5.5 million to exceed 14 million, or roughly 10 percent of the labor force.
The negative impact of this income inequality may be more pervasive than understood. As neurologist William Bernstein
wrote, a growing body of research
shows that income inequality imposes high social and medical costs. Income inequality may explain the rise in obesity, low economic growth, and high rates of homicide in America, compared with other countries. Other studies show that wide disparities in income make everyone -- not just the poor -- worse off. For example, Harvard professor of public policy and epidemiology Lisa Berkman
found that the wealthiest people in countries with less income disparity live longer than the wealthiest Americans. Other researchers have looked at the
impact of player salaries on team performance and found that not only did baseball teams with wider pay dispersion do less well than other teams, but the individuals on those teams also performed relatively poorly.
While correlation certainly is not causation, these figures provide pretty convincing evidence that we all could benefit from taking another look at whether low tax rates and high income inequality are helping or, as seems may be the case, hurting the U.S. economy.
After all, that aforementioned
$75 more per week that a median-income household started seeing in 2007 is barely enough to go out with the family to dinner and a movie, much less pay for
a checkup with the pediatrician. That somewhat more essential item than a movie will set the typical family back about $95.
