Topic: Commentary
One of the major claims/beliefs of conservatives, including genuine middle-class "Tea Party" type conservatives who are genuinely concerned about the state of the American economy, is that "redistribution of income" from income earners to welfare recipients is one of the major causes of stress on the American middle-class.
According to the Heritage Foundation (a major conservative think tank), welfare spending has increased from 0.5% of GDP in 1962 to 4.4% of GDP in 2010. The welfare programs cited by the Heritage Foundation are all clearly redistributive programs. These are food stamp, housing assistance, Medicaid, and income assistance programs.
The Heritage Foundation puts total welfare spending in 2010 at $648 billion.
It is absolutely true that there has been an increase in spending on anti-poverty programs over the past 50 years, and that spending on welfare programs is higher today than it has ever been, and it is absolutely true that these programs constitute "redistribution of income" from income earners to those with less or no incomes, however, this isn't the whole picture of redistribution in America.
If we grant that this $648 billion roughly represents the "forced" redistribution from the haves to the have-nots in America today (surely there is some charity in addition to this spending, plus there are other less direct programs that benefit the poor such as public schools, etc), the next question is, what about redistribution from the have-somes to the have-mores?
The middle-class is definitely getting squeezed in America, but who is doing the most squeezing?
Capital income is also a form of redistribution, which is why it is classified by the IRS as "unearned income". Income from capital constitutes income from dividends, interest, rents, and gains from the sale of capital, i.e. selling a stock for more than what you paid for it.
Ultimately all capital income is a tax on wages. Capital income comes from owning property, not from doing work. The value used to pay capital income has to be produced by work. Without work being done there can be no capital income.
Using a similar time-frame as that of the Heritage Foundation, what we find is that from 1960 to 2010 the portion of national income going to capital has increased from roughly 14% to 24%. The portion of national income going to wages has dropped from 67% in 1960 to 55% in 2010. If we look at the portion of wages going to the bottom 95% of the population what we find is that this has dropped from roughly 62% in 1960 to 44% in 2010. Sounds unbelievable I know, but that's the case. Only about 44% of gross national income in 2010 went to the wages of the bottom 95% of income earners. Even when we add in proprietor's income (income of small business owners) for the bottom 95% that still only adds up to around 52% of gross national income.
Now even if we ignore the wage issue and just focus on capital income alone, what we find is that in 1960 roughly 1.5% of gross national income went to the capital income of the top 5%, however as of 2010 roughly 12% of gross national income went to the capital income of the top 5% of income recipients.
So let's consider this. In 1960 roughly 0.5% of gross national income went to welfare programs for the poor and roughly 1.5% went to the capital income of the rich. Both of these are forms of redistribution from workers.
As of 2010 roughly 4.5% of gross national income went to welfare programs for the poor and roughly 12% went to the capital gains of the rich, and again, both of these are forms of redistribution.
This doesn't even take into consideration disproportionate income gains in the areas of wages and benefits, which I would argue have also been redistributive in relation to executives and other ultra-high income individuals, however there is a problem here of double counting, because a portion of that 4.5% going to welfare programs is actually paid by the rich, and so it isn't actually a direct drag on the middle-class. It is, in effect, a tax on the income that is redistributed from the working-poor and middle-class to the rich, and then redistributed back to the poor. But since welfare programs at the federal level are funded primarily from more progressive income tax, and the top 5% currently pay roughly 60% of federal income taxes, let's attribute 60% of that 4.5% of GNI to the rich, which leaves only 1.8% of middle-class income going to support the poor through federal taxation.
Let's also consider that some portion of the increased capital income of the top 5% in America is a product of redistribution from foreign workers, and thus not directly redistribution from American workers. Let's assume that one third of the capital income of the top 5% of Americans comes from foreign workers, that still puts the redistribution from American workers to rich capital owners at around 8% of gross national income.
So we conclude that somewhere around 1.8% of all income below the 95th percentile is being redistributed toward federal anti-poverty programs, and somewhere between 8% and 12% of income below the 95th percentile is being redistributed in the form of capital income to the top 5% of income receivers. (Note that this likely grossly underestimates the full level of redistribution from the middle-class to the rich since it doesn't take into account inflated fringe benefits and wages that are also partly paid for by underpaying middle-class workers.)
Whether or not you support the concept of capital income or believe in the merits of capital income as a driver of investment in productivity, etc. the fact is that the pie has to be split between wages and capital income, and the fact is that over the past 40 years that pie has been increasingly split in favor of capital, not wages.
We can clearly see the effects of this on compensation in relation to productivity. As productivity has soared, wages for the middle-class have stagnated. This is because the increases in productivity have gone increasingly to capital, executive bonuses, and ultra-high wage receivers, again like executives.
The fact that the income pie is going increasingly to capital isn't a problem in and of itself, in fact this is in many ways a good thing, the problem, however is that virtually all of the capital is owned by the wealthiest 5% of the population, and this is why the net effect is hugely redistributive. If capital ownership were broadly shared, then this effect wouldn't be considered redistributive, but under the current condition of high capital ownership concentration it is.
So if we consider the middle-class worker, the redistributive burden on them to support the poor is a small fraction of the redistributive burden on them to support the rich. In other words, the tax on labor to support the rich is at least 5 or 6 times higher than the tax on labor to support the poor, and this doesn't even take into consideration the burden of side-effects of wealth concentration, like the ways in which the wealthy are able to use their power to undermine the voting interests of the middle-class, etc.
Updated: Tuesday, February 22, 2011 9:50 AM EST
