The rich get richer, the poor ... pay Social Security tax

By Vin Suprynowicz
web posted January 24, 2000

It came as no great surprise when two Washington think tanks -- the Economic Policy Institute and the Center on Budget and Priorities-- reported last week that the gap between America's haves and have-nots has expanded in the past decade, with the earnings of the poorest fifth creeping up only 1 percent, while fat-cat income has jumped 15 percent.

"The benefits of this booming economy are not being evenly distributed," explained Jared Bernstein, economist at the Economic Policy Institute.

The main questions should be: Is this evil, and should government do anything about it?

In fact, even the report's authors concede: "In the last few years, persistent low unemployment and increases in the minimum wage have fueled wage gains at the bottom. As a result, there has been a lessening of wage inequality between the bottom and the top, although the gap between middle- and high-wage workers continues to grow."

Nonetheless, the redistributionists predictably intone in this report that "As the administration and financing of government programs continue to be shifted from the federal to the state level, state policy-makers must be prepared to shoulder additional responsibilities for pushing back against growing income inequality."

What the states should do, according to the analysts, is continue to raise the minimum wage; "implement a wide range of supports for low-income working families"; and, of course "reform regressive state tax systems" -- raise taxes on the rich.

There are a few problems with this prescription.

First, the poor are not worse off in America than they have been. America's "poor" would be considered wealthy anywhere else in the world. The statistics used in these studies don't even count non-cash government benefits to the "poor," like Food Stamps or Medicaid. The Cato Institute reports America's poor people manage to spend a dollar and a half for every dollar these government statistics claim they have.

More importantly: If sharecroppers in the 1920s saw their incomes tripled when they moved to Detroit and went to work building cars for Henry Ford, but Mr. Ford's own personal income jumped by a factor of 100 in the same decade, who did that hurt? Would anyone (other than the bureaucrats) have been better off had government stepped in immediately with punitive taxes to impoverish the Ford family -- even if the result had been cutbacks and layoffs at the factories?

Third, many "rich" families were actually in the "poorest fifth" a few decades ago. Then struggling college kids, they are now two-income couples at the top of their income potential -- doctors, lawyers, executives and airline pilots. Is it really right to try and "redistribute" their wealth to the young, the indolent, or those who decided to drop out of school to bear illegitimate children, at just the time in their lives when these high wage earners are finally educating the children they waited for, and trying to invest for their own retirements?

Finally, there's the question of whether policies advanced by outfits like the Economic Policy Institute and the Center on Budget and Priorities have actually contributed to this perceived "problem."

"I find there's a great deal of irony here," explains Michael Tanner of the Cato Institute.

"It's true that wealth is moving into fewer and fewer hands. We are in a society where about one fifth of the society holds about half of all the wealth. But these two groups (that issued the report) are the most active in fighting the remedy ... which is primarily Social Security privatization.

"The real reason for the wealth gap is that the wealthy can invest, and the poor can't," Mr. Tanner explains. The poor are "left with 12 and a half percent going into the Social Security program, which has a negative return and leaves them nothing to invest anywhere that will generate real wealth."

Martin Feldstein at Harvard has estimated privatizing Social Security would cut the "wealth gap" about in half, Mr. Tanner reports.

"We still have one of the most mobile societies in terms as moving from rich and poor, and vice versa. In 10 years, 14 percent of the poor will still be poor, and 14 percent will be rich. It's just that wages are becoming progressively less important; we have to create opportunities to invest," Mr. Tanner concludes.

Which means freeing the poor from the Social Security Ponzi scheme -- often the single biggest tax they pay.

As mundane as it may sound, incomes are still generally a factor of job skills and early life decisions. The best way to become financially secure in life is to complete one's education, get a job, and marry before having children. If state governments instead follow these analysts' advice and intervene with ever more redistributionist tax schemes -- removing both the incentives for those who work hard, and the real-world disincentives and penalties for those who indulge dead-end behaviors -- who do we really think that's going to help?

Vin Suprynowicz is assistant editorial page editor of the Las Vegas Review-Journal. His new book, "Send in the Waco Killers: Essays on the Freedom Movement, 1993-1998," is available by dialing 1-800-244-2224.

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