Our economy has changed radically. Our tax and welfare policies need to adjust accordingly.

Remember this chart?

I posted it in this space about three weeks ago. It shows, very effectively, the true extent of wealth inequality in America today. A majority of Americans are poor or barely out of poverty, while the top earners hold an absurdly large share of our national wealth. The chart is actually a screengrab from a six-minute-long video presentation which I highly recommend. If you’ve already seen it once, go back and watch it again.

I’m bringing this up again because it ought to be front and center in State House consideration of tax and welfare policy. Because the old assumptions just don’t hold true anymore.

After the jump: Inconvenient facts and figures. Lots of ’em.

First of all, let’s take a closer look at the low end of the curve — the share of wealth held by the bottom 60% of all Americans.

As you can see, the “Poor” have essentially nothing, while the “Middle Class” are barely better off. This is crucial when considering the proposed lifetime cap on Reach Up benefits. Reach Up is designed to help folks survive a rough patch and get back into the workforce. That’s the argument for a five-year cap: it’s not supposed to be permanent.

Which is true. But the unspoken rationale is that our economy is like a ladder: you move up one step at a time, and each step takes you farther away from poverty and closer to prosperity. But given today’s wealth inequality, you can take a bunch of steps and still be barely out of poverty. There’s no margin for error, and no opportunity to build savings against future hard times.

I look at this, and I see a very high likelihood that Reach Up recipents will have to return to the program — perhaps multiple times — not because they’re lazy, but because it’s extremely difficult to climb high enough to achieve and financial security whatsoever.

In America, it’s not a ladder anymore; it’s a mountain. And most of us are living in the flood-prone lowlands.

And how high is that mountain? Well, in the first chart above, you’ll notice that the top 5% have so much wealth that their lines shoot through the roof. Here’s another version of the chart with all the wealth squeezed onto the screen.

See those black columns on the right? That represents the total wealth in the hands of the top 1%. It’s completely out of scale with the rest of us — and even with the top 2-5%, who are merely wealthy, not obscenely so.

This fact ought to be driving our tax policy. The wealthy have done so well, that raising taxes on top earners is the only way to pay for government services. They’ve got all the money!

And they’ve got so much of the money, that reasonable tax increases should be completely painless for them.

We all have a sense that wealth distribution is out of whack, but it’s difficult to grasp the true scale of the problem. Here’s another screengrab from the video; this one shows three wealth distributions. The bottom bar is the wealth distribution that virtually all Americans (92% of us) believe to be ideal — the wealthy are rewarded for their efforts, but there’s a strong middle class and even the poor manage to have something.

The middle bar represents what Americans think our wealth distribution is: they realize that the rich are doing far better than everyone else, but they believe that we all get at least a slice of the pie.

And then there’s the top bar, showing the actual distribution of wealth. The top 10% have about two-thirds of all the wealth, and the top 1% have about one-third. The poor and middle class have nothing.

The difference between the middle bar and the top is what distorts our political dialogue — and policymaking.

It also feeds into middle-class resentment. They’re working hard but they’re not getting anywhere. They’re not doing that much better than welfare recipients. But nobody’s making their lives easier. In fact, they’re often asked to bear more of the burden.

Let’s look at one more chart, this one from our friends at the Institute on Taxation and Economic Policy. This shows the distribution of the state and local tax burden in Vermont.

In previous posts, I’ve referred to the outer ends of this chart. Now I’m focused on the middle. Vermont’s tax system is relatively progressive compared to most other states. Or, to put it more accurately, it’s less regressive. The burden borne by the bottom 40% is eased by our relatively generous Earned Income Tax Credit program. Even so, the rich pay proportionately less than the poor, who get socked by sales and property taxes.

But look where the burden is highest: on the people in the middle. And bear in mind that Vermont’s median income is about $53,000 a year — not chump change, but hardly Scrooge McDuck territory. No wonder there’s so much middle-class resentment of the poor. And no wonder, when you get out from under the Golden Dome, there’s a whole lot of anger about taxes. Many of the tax increases in the pipeline or under active consideration in Vermont will hit the middle. The gas tax. The property tax. (Yes, I know that’s not under state control. But it’s still a tax increase.) The soda tax, or its cousin, the sales tax on junk food. The break-open tax, aimed squarely at one of the popular amusements of the working class.

Take all these charts together, and you see a clear and convincing case for raising taxes on the wealthy. The top earners, making huge money and paying around 8%, are not “taxed out,” as the Governor likes to assert. The middle, paying ten and a half percent, are the ones who are taxed out.

Let’s talk pure politics for a moment, and set aside all that moral and ethical stuff. Instead of nickel-and-diming the working poor and middle class who already pay more than their share, and making it seem like the Democrats want to tax everything, why not a clear, clean tax increase on the wealthy?

I don’t have to answer that one. Governor Shumlin doesn’t like it.

Well, the Governor is wrong.  

4 thoughts on “Our economy has changed radically. Our tax and welfare policies need to adjust accordingly.

  1. A few comments from the peanut gallery:

    1) “The middle bar represents what Americans think our wealth distribution is: they realize that the rich are doing far better than everyone else, but they believe that we all get at least a slice of the pie.”  Minor quibble: the bar is actually a line.  But that’s not the point I wanted to raise.

    Why is Americans’ perception so far from reality?  After all, Americans aren’t born with an innate idea about wealth distribution: they learn what they think they know somewhere.

    The answer? We have a heavily skewed distribution of wealth AND a propaganda system (“schools,” “media,” etc.) in place which keeps that fact hidden from most Americans.  

    2) You show both wealth distribution and the tax chart, but miss what seems to me a fairly obvious point: namely, part of the reason that income skews upwards is that taxation skews downwards, both in the state (which is the chart you’re showing) and in the country as a whole.  This has been true for a very long time.

    The highest income earners have arranged a tax system which allows them to keep more of their pre-tax income, while assigning the task of paying for government to their poorer compatriots. Their income allows them to pay the lobbyists to keep the system in place.

    3) As long as you’re on a roll, it would be fascinating to see some data on the correlation between income and the benefits received from governments.  We are taught to believe that the poor are milking the system.  Romney’s whole meme about the 47% depended on the notion that “we” pay while “they” get all the benefits. My guess is that the reality is precisely the opposite.

  2. be obvious that our decades long “war” on poverty has not worked. For the most part, it consists of income transfers that (thankfully) help with housing, food, and health care. However, most such programs do not (cannot) help low-income Americans build wealth. So while the ongoing conversation about taxes is important, we must also have a conversation about how to address this persistent problem. What have we learned in the last half-century?

  3. The Walton family collectively own more than the lower 40% of all American’s income combined.  I don’t know the number of Waltons that share in this.

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