The Poor Get Richer After Taxes
NEW YORK ( MainStreet) The Congressional Budget Office (CBO) released a report, December 4, titled the Distribution Household Income and Federal Taxes for 2010. What it says about income inequality - and income redistribution - is enlightening.
Judging from the CBO report, income redistribution by the federal tax system in the United States is dramatic. Although it will not make the poor wealthy, it does show that the federal tax system does redistribute income -- and significantly so.
Some say it goes too far; others say the system does not go far enough.
For example, those in the lowest income quintile ($8,100) earned 2.3% of all "before tax" income; this group paid no federal taxes; but after adjusting for government transfers and taxes, their percentage share of all 'after tax' income ($30,800) increased to 9.3%.
Meanwhile, those in the highest quintile ($234,400) earned 57.9% of all "before tax" income; they paid 69.3% of all federal taxes ($58,900), but after adjusting for government transfers and taxes, those in the highest quintile now garnered only 47.2% ($181,900) of all "after tax" income.
So, according to the CBO, the highest income quintile's percentage share of "before tax" income is about twenty-seven times that of the lowest income quintile's percentage share. But the highest income quintile's percentage share is severely reduced to about five times that of the lowest income quintile's percentage after the redistribution of income as a result of the federal tax system.
Simply put, wealth redistribution policies more than tripled the income of those in the lowest fifth, but these same policies reduced the income of the highest fifth by about one-quarter.
Some economists think this is a desirable result. Others do not think this is such a laudable outcome.
Thomas DiLorenzo, an economics professor at Loyola University in Maryland, said the welfare state/progressive tax system reallocates billions of dollars away from capital investment to current consumption.
"Capital investment is the prerequisite of economic growth," asserted DiLorenzo. "The system therefore cripples economic growth, and growth of labor productivity as well, which makes us all poorer, especially the bottom quintile of income earners who need economic opportunity the most. Capitalist economic prosperity is the great income equalizer, and it is crippled by the socialistic welfare state/progressive income tax system."
Yet there are some who believe that the redistribution of wealth is not nearly what it should be. The CBO report clearly shows that more money needs to be shifted to the lower income brackets.
"[The CBO report] tells me that the lowest quintile are being helped to some extent," observed Nancy Fox, an economics professor at Saint Joseph's University in Philadelphia. "But government transfers are not doing a great job of income redistribution, because the wealthiest are still earning about half of all after tax income. They are not being taxed high enough."