Redistributionists relying on the income tax? Good luck with that

James Piereson explains in the latest issue of Commentary magazine why higher income tax rates do little to advance the cause of people who want to take money from the rich and give it to the poor.

Public-opinion polls over the years have consistently shown that voters overwhelmingly reject programs of redistribution in favor of policies designed to promote overall economic growth and job creation. More recent polls suggest that while voters are increasingly concerned about inequality and question the high salaries paid to executives and bankers, they nevertheless reject redistributive remedies such as higher taxes on the wealthy. While voters are worried about inequality, they are far more skeptical of the capacity of governments to do anything about it without making matters worse for everyone.

As is often the case, there is more wisdom in the public’s outlook than in the campaign speeches of Democratic presidential candidates and in the books and opinion columns of progressive economists. Leaving aside the morality of redistribution, the progressive case is based upon a significant fallacy. It assumes that the U.S. government is actually capable of redistributing income from the wealthy to the poor. For reasons of policy, tradition, and institutional design, this is not the case. Whatever one may think of inequality, redistributive fiscal policies are unlikely to do much to reduce it, a point that the voters seem instinctively to understand. …

… The highest marginal income-tax rate oscillated up and down throughout the 1979–2011 period. It began in 1979 at 70 percent during the Carter presidency. It fell first to 50 and then to 28 percent in the Reagan and Bush years. It rose to 39.6 percent in the 1990s under the Clinton presidency, and went down again to 35 percent from 2003 to 2010. It is now back up to 39.6 percent. The highest rate on capital gains moved within a narrower band, beginning at 28 percent in 1979 and falling as low as 15 percent from 2005 to 2011. The highest rate is currently 23.8 percent.

Over this period, regardless of the tax rates, the top 1 percent of the income distribution lost between 1 and 2 percent of the income share after taxes were levied. In 1980, that group claimed 9 percent of before-tax income and 8 percent of after-tax income. In 1990, the figures were 12 percent before tax and 11 percent after tax. In 2010, the figures were 15 percent before and 13 percent after.

The top 10 percent of the income distribution generally lost between 2 and 4 percent of its income share after taxes were levied. That is probably because those households take a greater share of their income in salaries rather than capital gains compared with the wealthiest Americans.

At the other end, the poorest quintiles gained almost nothing (about 1 percent on average) in income shares due to cash and in-kind transfers from government. In 2011, for example, the poorest 20 percent of households received 5 percent of (pre-tax) national income, and 6 percent of the after-tax income. …

… With respect to the recipients of federal transfers, the CBO study reveals a surprising fact: Households in the bottom quintile of the income distribution receive less in federal payments than those in the higher income quintiles. Households in the bottom quintile of the income distribution (below $24,000 in income per year) received on average $8,600 in cash and in-kind transfers. But households in the middle quintile received about $16,000 in such transfers. And households in the highest quintile received about $11,000. Even households in the top 1 percent of the distribution received more in dollar transfers than those in the bottom quintile. The federal transfer system may move income around and through the economy—but it does not redistribute it from the rich to the poor or near-poor.

It is well known in Washington that the people and groups lobbying for federal programs are generally those who receive the salaries and income rather than those who get the services. They, as Senator [Daniel Patrick] Moynihan observed decades ago, are the direct beneficiaries of most of these programs, and they have the strongest interest in keeping them in place.