Thursday, January 14, 2010

Soak the Rich

When I was in grad school, the professor in my microeconomics class commented one day, in the course of a class discussion, that one couldn't really produce all that much revenue just by raising taxes on the rich, because there wasn't all that much money there. The idea was that if you multiply a high annual income by a small number of people, you get a number that's not very big. Therefore, any serious revenue-raising had to come from hoi polloi, the multitude of the middle class.

Was he right? It depends on what you consider a lot of money, and what you consider rich. In 1981 (approximately when my professor made his comment), the top ten percent of the population had about 35% of the total income in the U.S. (My figures come from here, an updated version of what is generally considered to be the best source. They may not be exact, because I'm reading them off a graph.) This is a reasonably large chunk of money, but it extends well down into what would normally be considered the upper middle class. If you look at the top one percent (still around a million households) the total was only 10% of total income. And if you want to go after the super-rich, the top 0.01%, the total was only about 1.5%.

That was then. What about now? Times, it turns out, have changed. There has been a substantial growth in the share of the top ten percent; that segment now gets some 50 percent of the total income. (By "now" I mean 2007.) What is much more interesting is that practically all of that growth (13 out of 15 percentage points) is accounted for by the top 1% of the population. The share of the top 1% has gone from 10% in 1981 to a startling 23% in 2007. That's a little over $3 trillion. The super-rich have gone from 1.5% to 6% of the total, or about $830 billion. That strikes me as serious money. Roughly speaking, if we took another ten percent of the income of the top hundredth of one percent of the U.S. population, about fifteen thousand households, it would pay for health care reform.

Sorry, I'm so stunned that I'm going to repeat that. Take the 15,000 highest-income households in the U.S. Take another 10% of their income. That's enough money to pay for health care reform.

Addendum: The 2006-2008 American Community Survey estimates an average household size of 2.61 and household population of 293 million, for 112 million households. So 11,200 seems a reasonable estimate of the top 0.01%.  But the reference above gives a figure of 14,988, so I've used that number. I can only conclude that the IRS is using a very different definition of household than the Census is. A bit under 3% of the population lives in "group residences" (for example, prisons, nursing homes, military barracks, college dorms), but that doesn't come  close to accounting for the difference.

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