“Neighborliness” – The New Form of Social Redistribution of Wealth

On September 8, 2008, Barack Obama appeared on Bill O’Reilly’s The Factor (Fox News Channel) to answer questions about his proposed economic policies. A key point of contention was Obama’s intent to raise federal income and capital gains tax rates on the “rich” (which he defines as anyone earning over $250,000 per year) AND remove the upper limit on social security payroll taxes (currently capped at 6.2% of an individual’s first $97,500 of income AND matched by the employer (i.e., a total of 12.4%)). Obama believes that because the “rich” can afford it, then they should pay to fund a “tax cut” for 95% of all Americans. He further views his tax proposals as ”neighborly,” which he rightfully identifies as an American virtue. The problem, I believe, is that the average American does not interpret being “neighborly” as a virtue that requires Washington to be in the middle nor does it view “neighborliness” as a redistribution of wealth between Americans. Instead, they see “neighborliness” as neighbor helping neighbor, as individuals, and not as classes. The average American believes in equality of opportunity and not in Obama’s social Marxist view of equality of outcome. So who are the “rich?” What do they do with their wealth? What are the potential consequences to all Americans of Obama’s plan?


Who are the “rich?” By “rich,” Obama means those who have been financially successful. This is distinction that deserves emphasis, because the term “rich” is not necessarily the same as being “financially successful.” To the average American, “rich” has a negative connotation, and it is easier to tax the “rich” than it is to tax success. In fact, many people are “rich,” but would not be classified as financially successful. For example Mother Teresa was rich but she was not what the world would claim to be financially successful. Second, it is important to distinguish exactly who Obama wishes to tax: those who have taken financial risks far beyond those of the average employee, who in many cases failed multiple times before succeeding, who worked hard, who invested in their businesses, and who created the jobs that ALL Americans enjoy.


The “rich” are typically people who either own businesses in America or receive employment from those businesses. From a demographics perspective, 80% percent of these businesses are sole proprietorships, partnerships, or S-Corporations (which are taxed at individual tax rates) and 20% are large C-corporations (which are taxed at corporate rates). The small businesses they own are recognizable in every town: gas stations, laundries, retail franchises, and other boutique family businesses. According to 10 Secrets that Millionaires Keep, by Daren Fonda of Smart Money, the financially successful, who have a net worth of $1M, are 90% more wealthy than other US households, earn on average $366,000 per year, and are in the top 1% of taxpayers. Their number has doubled since 2002, with half of them earning their wealth from small business, one-third from large corporations, and less than 3 percent through inheritance. Most come from families, which would not be classified as wealthy, and have enjoyed their financial success for less than 15 years. Their median grade-point average in college was 2.9, with an average SAT score of 1,190. Fifty-nine percent attended a state college or university. Their secrets to success, in their words: hard work, discipline, education, and treating others with respect. Other than their wealth, the “rich” seem to be a lot like the average American, except they have taken extraordinary risks, worked smarter and harder, and converted the opportunities presented to them into greater financial success.


How do the “rich” spend their money? Before they can spend it, they must pay taxes to the government. The top 1% of earners pay 40% of America’s federal income tax. In fact, the top 10% of earners pay 70%, and the top 50% pay 97%. Like all other wage earners, in addition to FICA, the “rich” pay 6.2% on their personal wages to fund social security, up to a maximum salary of $97,500 and 1.45% on all wages to fund Medicare. Because the average wage earner makes approximately $50,233 (2007 Census Bureau), the average wage earner pays, on average, $3,868 in payroll taxes. This is matched by the employer, who pays an additional $3,868. Under the current tax scheme, the financially successful, who earn over $97,500, will pay $7,459; however, fifty percent of them who own their businesses or are sole-proprietors will pay twice this, or $14,918, because they have to pay their own matching contribution. In effect they are paying 3.9 times more than an average wage earner working for a large corporation. These taxes are paid before any other taxes are paid. If Obama eliminates the cap on the Social Security payroll tax, so that all income is exposed to this tax, the average “rich” person who owns his own business will pay 12.4% on his or her full $366,000 in earnings or $45,384, or 3 times his or her current payroll tax level and almost 12 times that of the average American. This is before he or she pays increased marginal capital gains and income tax rates under the Obama plan (see Taxing the Rich is Really Taxing All of Us). Is this fair? It does not seem fair to me, especially in light of the fact that the financially successful person will never receive a payout from social security that even comes close to what was paid in. Based upon projections provided to me over the years by the Social Security Administration, I expect that I will receive approximately $1,500 per month in benefit. This will be substantially offset by income from other financial sources: in effect, my contribution will be transferred to others – simply another tax and redistribution of wealth.


So what does the financially successful person do with what is left? He or she invests it or spends it. Investment means capital formation that leads to further business growth and jobs. Spending includes both consumption and charitable contribution. Expenditure on consumption – you guessed it – creates jobs and opportunities for others to become financially successful. Charitable contributions meet the many social needs of our communities and fund that aspect of “neighborly” which can only be met by monetary investment. According to Arthur C. Brooks, of the American Enterprise Institute, charitable giving in America, which was $265B in 2006, has risen faster than the growth of the American economy over the past half-century. For example in 1995, “Americans gave per capita three and half times as much to causes and charities as the French, seven times as much as the Germans, and 14 times as much as the Italians.” The top ten percent of American earners are responsible for seventy-five percent of giving, and the top 1% of earners represents half of the giving. So who gives more, conservatives or liberals? According to Brooks, “The fact is that self-described ‘conservatives’ in America are more likely to give – and give more money – than self-described ‘liberals.’ In the year 2000, households headed by a conservative gave, on average, 30 percent more dollars to charity than households headed by a liberal. And this discrepancy in monetary donations is not simply an artifact of income differences. On the contrary, liberal families in these data earned an average of 6 percent more per year than conservative families.”



What are the implications of Obama’s tax policy? Simply put, instead of returning a tax rebate to wage earners based upon their contribution (viz., a rate reduction across the board), he proposes to tax the “rich” and return their tax receipts in the form of payments to a majority of Americans who pay little or no income tax. In effect, he is going to take from the financially successful – the backbone of the American economy – and redistribute the wealth to those who did not earn it to ostensibly meet their day-to-day “needs.” In the process, he will: (1) remove capital from the economy that creates opportunities and jobs; (2) drive down charitable contributions by individuals that fund truly “neighborly” projects and place decision making for social concerns in the hands of government rather than individuals; and (3) most importantly, destroy the incentive of financially successful people to compete in the marketplace while incenting those who are either unwilling or unable to compete to “vote” rather than work for their financial success. This is not capitalism; it is social Marxism.