December 9, 2010
Class Warriors Got What They Wished ForBy Randall Hoven
A funny thing happened on the way to spreading the wealth: wealth dried up.
A good class warrior wishes for three things (at least).
Now think about that for a moment. If the class warriors got their first two wishes, their third wish would be impossible. If you tax only the rich, yet you have no rich, then government collects no revenue. You can't spread wealth if there is no wealth.
And here is the punchline: that is exactly what is happening now, just not as starkly.
In 2007, those making over $200,000 per year did not pay all federal income taxes -- just 52% of them. Then came the Great Recession. Taxable income of that group declined 16% from 2007 to 2008. Taxable incomes went up slightly for the middle class, or those households making between $40,000 and $200,000.
And what about the really rich: those with gross incomes over one million dollars? There were 18% fewer tax returns from such households and 25% less taxable income. As a result, the federal government collected $60 billion less from such households in 2008 than in 2007. (See tables at the end of this article.)
The Great Recession was a great time for class warriors. Incomes for the rich went down quite a bit in a single year (and only the first year of the Great Recession), while those for the middle class stayed about the same.
The result was predictable: much less revenue for the government. Federal income taxes from the middle class ($40,000 to $200,000) went up by $2 billion, but those from the rich (over $200,000) went down by $73 billion. This was not because of tax rate cuts; there weren't any. It was because there were fewer rich households and less income for such households.
Real GDP fell only 2.8% from 2007 to 2008, but federal revenue fell almost twice as much: 5.2% in constant dollars. Through 2009, federal revenues were down 21% from 2007, leaving a gaping shortfall in revenue of over half a trillion dollars (inflation-adjusted) and an unprecedented federal deficit. (Tax figures for 2009 are not yet available. I suspect they will show the same pattern: loss of federal revenue due to loss of income at the higher levels.)
Revenues did not fall because of a tax rate cut; there was no tax rate cut between 2007 and 2009. Revenues did not fall because of some giveaway to the rich. In fact, the problem was just the opposite. Revenues fell because there were fewer rich, and the rich made less money -- just as class warriors wanted.
We had a progressive tax structure that relied on the rich getting richer. Then we got what we wished for: for the rich to become like us. So now we're all broke. We had a bubble-based tax system, and the bubble burst.
Why do you think revenues fell by over 20% to the federal government and states like California during the Great Recession, when GDP fell only 4%? Because the federal government and states like California have extremely progressive tax structures. You get rid of the rich, and you get rid of government revenues (and job creation). Believe it or not, the rich lost more money in the Great Recession than the rest of us did. Our golden goose is cooked.
Discussions of how much to tax the rich are ever more akin to fiddling while Rome is burning. Before you can get money from the rich, you have to have rich households, and they have to have money. You can't tax what you've destroyed.
Be careful what you wish for. Or vote for.
Some key data from the IRS are summarized in the tables below. Source: IRS, Table 3.5, for the years 2007 and 2008. Data for tax year 2009 are not yet available through the IRS site. (Dollar amounts in the table below are rounded. Percentage changes were calculated on the unrounded values in the original IRS tables.)
Number of Tax Returns
Taxable Income ($billions)
Federal Personal Income Tax Generated ($billions)