Income Inequality: Some Things You Should Know

President Obama said recently that income inequality is a “defining challenge of our time”. We know that he was speaking code for “we need to redistribute more income from those that earn it to those that don’t earn it.” That’s what our tax code is all about, that’s what our welfare programs are all about, and that is what Obamacare ia all about.

We, on the Right, will often argue that people are inherently not equal and in a free market system those who have better skills and work harder will naturally earn more than those with lesser skills and who don’t work as hard. Those are valid arguments but do not explain all of the inequality in incomes by a long shot. Part of the reason is that we do not have a free market system in America due to a myriad of laws and regulations that benefit the rich, on one end of the economic scale, and the poor, on the other end of the scale. And, of course, it is the middle class that suffers from these planned distortions to the market place. Maybe the worse distortion to the market place ever devised by man is the Federal Reserve’s Quantitative Easing (QE) policy along with its Zero Interest Rate Policy (ZIRP), which we will talk about a little later.

Should the rich pay more taxes?

Maybe the answer depends as President Bill Clinton famously once said: “it depends on what the definition of “is” is.” What’s your definition of “rich”. If you include the top 40% income earners as rich, then this CNBC article says: The rich do not pay the most taxes, they pay ALL the taxes.

Buried inside a Congressional Budget Office report this week was this nugget: when it comes to individual income taxes, the top 40 percent of wage earners in America pay 106 percent of the taxes. The bottom 40 percent…pay negative 9 percent.

How is that possible? We know that many people in the lower 60% income group do indeed pay federal income taxes. Ah! The benefits of income redistribution are very much evident. From the same CBO report we learn:

…The report shows the lowest-paid Americans earned on average $8,100 in 2010 but received nearly $25,000 in government aid. You begin to see how “transfers” create a negative tax burden.

…The CBO says about a quarter of the lowest earning group actually paid negative 15 percent of all individual income taxes. Contrast that with the combined share of the wealthiest two groups, which totals more than 100 percent.

Hmmm! I guess that is what liberals call “fair”.

Are markets rigged?

Zero Hedge reports that Amanda Lang of CBC asked that question and answered thusly:

“Historically, the system works because people have confidence in the rules and believe they are treated the same as anybody else.

But it’s getting harder and harder to ignore the stories of powerful people cheating the system for their own gain. As the bad apples add up, it gets harder and harder to ignore a troubling realization — “everything is rigged.””

If you look at the number of investigations and settlements being carried out against the biggest investment bankers, you can understand Ms. Lang’s concern. Bloomberg has a series of interesting charts here. On the subject of Foreign Exchange manipulation there are no settlements yet, but the following banks are under investigation:

  • Barclays
  • Citicorp
  • Credit Swiss
  • DdeutscheBank
  • Goldman Scahs
  • J P Morgan
  • RBS
  • UBS

On the subject of manipulating energy prices there have been $822 million in penalties paid by

  • Barclays
  • Deutsche bank
  • JP Morgan

On the subject of manipulation of the LIBOR rates, $3.6 billion in penalties have been paid. Which banks are undr investigation?

  • Barclays
  • Citigroup
  • Deutsche Bank
  • JP Morgan
  • RBS
  • UBS

On the subject of the 2008 sub-prime mortgage scandal, $415 billion in fines have been paid by the same group banks in the previous scandal with the addition of Wells Fargo.

So, Ms. Lang has good reason to be concerned about the criminal element in the finance industry the TBTF banks.

Legal Market Manipulation by the Fed

Without getting into a debate about whether the record stock market is the intended or unintended consequences of the Fed’s Quantitative Easing and Zero Interest Rate  policies, there is no doubt that pumping up Wall Street is the result of these Fed policies. Company earnings do not justify these stock prices. So, while most American have not seen much in the way of a recovery sence 2008, some folks on Wall Street are reaping the rewards of a friendly Federal Reserve’s  easy money policies. Zero Hedge explains how well the wealthiest 400 Americans are making out:

Hidden deep inside the IRS’ most recent annual report focusing on just the Top 400 Individual Tax returns, titled “The 400 Individual Income Tax Returns Reporting the Largest Adjusted Gross Incomes Each Year, 1992-2009” we find the definitive confirmation of just where the Fed’s Wealth Effect has gone. As seen in the highlighted cell on the table below, just the top 400 individual tax returnsaccount for a whopping 16% of the net Capital Gains tax paid in the US in all of 2009 (the most recent year recorded).

Imagine that! Four hundred of America’s wealthiest skimmed off 16% of all the capital gains in the US in 2009. And, if you look at the slope of the curve at Zero Hedge,  these folks must have really cleaned up in these last four years. Is it any wonder that people like Warren Buffet say their in favor of paying higher taxes? If Fed policy is helping your income grow by billions, you don’t mind paying a few million more in taxes.

Maybe President Obama is right. Maybe income inequality is a defining issue of our time. But, he and his crony friends and the Federal Reserve are going to make the problem worse not better.

Well, that’s what I’m thinking. What are your thoughts?

12 thoughts on “Income Inequality: Some Things You Should Know

  1. This just reinforces my opinion that the greatest villain in American history is Woodrow Wilson. The idiot not only gave us the federal reserve but created a precedent for interfeing in Europe’s wars.

    1. And a hundred years later that which this progressive pig’s policies has put in jeopardy all I spent my working life putting together as an inheritance for my sons. They may end up with less than what the dependency classers leave on their EBT card for dey’s chillins…Uhm Uhm Uhm.

  2. There is entirely too much interference in all things financial (other things as well). The government seems to believe us normal folk can’t get along without their watchful eyes upon us. I’m afraid far too many Americans have came to believe that lie.

  3. The real issue isn’t income inequality. The poverty level is a better indicator of how Americans are doing, and by that measure the poorest Americans are in most cases better off than many middle class citizens in other countries. A person who can afford a car and air conditioning is not, by definition, really all that poor, and that is the situation of most people below the poverty level in America today. More worryingly is the lack of opportunities being offered in America today. Much of this is directly because of government interference in business. The government is running the economy into the ground and is responsible for capital flight with its policies. Meanwhile, those people who do want to invest are hamstrung by government regulations.

    1. Poverty in America is not the same as poverty in most of the rest of the world. I agree, John. But, al things are relative and so our poor do feel poor. Our middle clas is struggling to stay middle class. As you say, the government is ruining the economy, which in turn motivates businesses to seek more computerization and automation, which kills opportunies to move up the economic laddder.

  4. The ultimate goal of the progressives, no matter how much they talk about helping the middle class, is the elimination of the middle class. The only middle class left when they are done is made up of mid-level bureaucrats working for government. Otherwise what you have is the rich, which consists of government officials and their cronies in the private sector, and the dependent class (the poor). Then, of course, the whole thing collapses because nobody is really producing anything, and certainly nothing new. The dynamism of the capitalist system, which creates a middle class, and allows for upward mobility, is shut off.

    Government breaks it, then complains about it being broken, then does more to destroy it. That’s how it works.

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