Taxes and Income Inequality

In today's political discourse, it is rare that we find areas of widespread agreement.  Surprisingly, one thing most people agree on is an economic issue: economic growth is the best way to reduce the debt and deficit.  Frustratingly, this consensus in goals has not led to any consensus in policy, mostly because politicians are too busy arguing whether or not wealthy people deserve 65 or merely 60% of their annual income.  I cannot, for the life of me, understand why keeping top marginal tax rates low is still an issue, much less a priority, in the tough economic times that we are in.  If the government has a budget shortfall to the point where it can no longer operate, then it is time to raise taxes.  The argument that raising taxes on "job creators" will tank the economy does not hold water.  Here are two graphics to illustrate my point:

The first is simple: a chart that maps national GDP growth and top marginal tax rates from 1946 until 2011.  Simply put, there is no correlation between tax rates and GDP growth.  The GDP (marked in red) bounces up and down irrespective of the marginal tax rate.  When taxes were at their peak in the 1950's, economic activity was more robust than it is today.  The argument that raising taxes on the wealthy will destroy the economy is unhistorical.  Another way to put that: it's a flat out lie.

The second chart is a little more intimidating, but it isn't too bad.  It maps top marginal tax rates (MTR) against the portion of income that the richest 1% earn annually.  The black lines represent the share of annual income held by the richest 1% and the red lines show the top marginal tax rate.  The two lines are in inverse correlation to each other: when tax rates are high, income inequality is low.  When tax rates are low, as they were in the antebellum period before WWII and as they are now, income inequality skyrockets.

These two graphs give historical evidence that we should, just like was done in "traditional America," raise tax rates on the wealthy.  When tax codes were more progressive, prior to the Reagan years, economic inequality was low, but economic activity was booming.  As the tax code was reformed to become more regressive, the economy continued to grow, but fewer and fewer dollars trickled down to the masses.

How bad is it now?  Income inequality is still burgeoning, despite the economic slowdown.  This chart shows how income distribution changed from 2010-2011, illustrating that the richest among us continue to get richer, while the rest of the population sees their incomes decline.  To put a historical perspective on it, this chart shows the annual incomes of families, broken down into quintiles and the top 5%.  Things have steadily gotten worse, and the gap between rich and poor is still growing.

This data suggests that trickle-down economics do not work for the people.  Trickle-down economics only serves Wall Street fatcats who are adept at making money out of money.  It is anti-democratic to argue that the best possible economic system is one in which we entrust our homes and savings to a set of oligarchs; furthermore, it is not supported by facts or history. Since the recession, corporations have frequently posted record profits and passed on the gains to their executives (presumably for doing such a good job at blowing up the economy and cutting jobs).  If raising taxes on the wealthy will make these greedy bastards quit working as they claim, then that is all the more reason to do so.  They have been wrong in their economic predictions in the past, and the smart money says that they will be wrong again.  Raise taxes.  It's the right thing to do.