The Clinton Indictment
No sooner had the IRS released its "Table Five," its breakdown of tax returns from the year 2005, than the leading Democratic presidential candidate was out with a statement complaining about "widening income inequality." Said Senator Clinton, "the share of national income going to the wealthiest 1% of Americans grew to 21% — a level not seen since the Gilded Age. This is an indictment of President Bush's economic policies."
Well, refreshing though it is to see the word "indictment" in a Clinton press release that contains neither a vigorous denial nor a reference to a campaign fund raiser, allow us to differ. The actual IRS Table 5 for 2005 makes for some fascinating reading. To begin with, the wealthiest 1% of Americans, according to the IRS, were those filers who had an adjusted gross income for 2005 of $364,657. By international standards, that is a lot of money, but here in New York City, and especially Manhattan, where ordinary one-bedroom apartments are selling for $1 million and private school tuitions are topping $40,000, it's hardly Gilded Age-level. By the time a two-income couple earning $364,657 a year get done paying for taxes and child care, plus graduate school debt, they aren't living in the Vanderbilt mansion.
And how about those taxes? Mrs. Clinton mentions that the top 1% earned 21%of the income. But her press release leaves out what the IRS table reports — that they paid 39.38% of the federal income taxes. That's right, 1% of the tax filers paid 39.38% of the federal income taxes. That's a greater share than at any time in the past 20 years. That top 1% paid an average federal income tax rate of 23.13%, nearly double the average tax rate on the whole country of 12.45%. The top 5% of tax filers — those with adjusted gross incomes more than $145,283 — paid 59.67% of the federal income taxes, also a 20-year high. It's not the income inequality that rivets our attention, but the tax inequality, with the top earners being soaked for far more than their share of the income earned.
There are growth-deterring consequences to such a "progressive" tax system, which is one reason there is increasing support among academics and at the grassroots for a transition to a system that taxes consumption rather than income. But we don't mind saying that both the inequality in respect of taxation and the inequality in respect of income bother us less than then they otherwise might, because the top 1% in America is a faction that changes from year to year. It's not the same people each year, in other words, who are earning the most money and paying the most taxes.
The Clintons themselves are a fine example. They used to be middle-class, surviving on government wages and mired in legal bills. Now they are rich, what with President Clinton's income from speaking fees, book advances, and consulting work. Many of those in the top 1% of income earners in 2005 might have just had one good year that put them there — earning a bonus for exceptionally good performance, say, or getting paid out on a pop song, or getting a lucrative, but non-recurring contract. Those who did well in 2005 may do not as well in 2006 or 2007, as the demise of the Amaranth and Sowood hedge funds and the thousands of out-of-work investment bankers who bet wrong on sub-prime mortgage debt can attest.
Some of the biggest fortunes of today were made in industries like software and computers that did not even exist in the Gilded Age. It's a tribute to the culture of opportunity that keeps the American economy dynamic. For our part, we are less concerned about income inequality than about those, like Mrs. Clinton, who would indict it, and particularly who indict it while being among the top earners themselves. In so doing, they seek to punish and deter the success that others in America strive for, rather than celebrating and encouraging it.
