Spreading the Wealth

I'm getting a little tired of the term "spreading the wealth" being thrown around in the media.  Somehow they have convinced most of the voters that this means "steal from the rich, give to the poor".  I understand the sentiment - I really do.  People are scared to death of the idea that someone who works hard and makes money will have it taken from them and given to someone who is lazy.  Fortunately, this is not what is going on, nor what is proposed by anyone.

 

Every economy has a wealth and income distribution curve associated with it.  While the income distribution can easily be calculated, the wealth distribution is nearly impossible to calculate.  This is because most wealth is in the form of unrealized capital gains.  The income distribution is traditionally put into perspective using the Lorenz curve.  Plotting the income distribution using the Lorenz curve method allows you to calculate a ratio called the Gini ratio. 

 

A Gini ratio of 0 would represent total income equality where everyone in the country had the same amount of income.  A Gini ratio of 1 would represent the other extreme where all of the income in the entire country went to 1 person.  Other industrialized nations like Canada, England, Germany, Japan and Sweden have an Gini ratio between .25 and .35.  This range is typically considered to represent a healthy economy.  Non-industrialized nations like Nigeria and Brazil have Gini ratios between .51 and .59.

 

So what is the Gini ratio of the US?  It is currently about .46 and even got as high as .47 in 2006.  We have the highest Gini ratio of any industrialized nation and are much much closer to countries like Nigeria than we are to some of the healthiest economies in the world like Sweden (.25).

 

By the way, some people have calculated the curve based on an estimation of wealth instead of income and the United States was close to 0.90.

 

Anyway, when you hear the term "spreading the wealth" or "income redistribution" this is referring to the idea that we need to get our income distribution back to a health number or we will end up in dire straights eventually.  There are many theories as to why the current income distribution is reaching such dangerous levels - though none of them give a complete explanation.  We do know one thing though, is that when 99% of the money in the country is in the hands of a few powerful people, bad things start happening. 

 

No one is proposing to steal money from hard working Americans and give it to lazy bums.  The tax adjustments are a temporary fix to a bigger problem.  Do you really think that CEO's earning 120 million a year, who are performing illegal manipulative accounting schemes to boost stock values and their pay (which is always tied to stock price), and getting tens of millions in the form of a golden parachute when they get fired - do you really think these people are "working hard" and "earning" their 250 million dollar pay days?  These people at the top are being handed tons of money at the expense of us.  They are paying lobbyist to block bills that give the SEC the power to regulate their shady accounting practices.  They are donating millions to campaigns in return for getting riders on bills passed that allow them to hide their money and avoid hundreds of millions in taxes.  They are getting bills passed as favors that allow them to setup "mailbox" satellite offices in Bermuda and claiming it their headquarters thus qualifying as an international company any saving hundreds of millions in taxes.  These are some of the corrupt things that are going on and are just a few examples of "behind the scenes" crap that the Bush administration has done. 

 

Who do you think shoulders the brunt of this when tax revenue mysteriously falls short tens of billions of dollars?  Why is no one uneasy about the fact that we are borrowing nearly 400 billion dollars a year from China?  Why does no one care that we are more than 10 trillion in debt and going in the hole 500 billion per year more - year after year (ever since the bush tax cuts went into effect). 

 

Which reminds me... the bulk of the proposed Obama tax plan is merely cancelling the irresponsible '01 and '03 tax cuts that the Bush administration implemented and put us into this deficit block hole that we are spiraling deeper into currently.  He will extend the Bush tax cuts for people making under $250,000 and cancel it for people making over $250,000.  He will also fix the Alternative Minimum Tax - and if you do not know what that is, you may want to read up on it because if it is not fixed it will end up costing middle class Americans thousands of extra dollars in taxes (per year) within a couple of years.  Imagine doing your taxes and seeing a $3000 refund, only to find out that you are now subjected to the AMT and end up owing $2000 instead.

 

Anyway back to the income distribution topic.  Above are some of the reasons that the Gini ratio is getting dangerously unhealthy.  Granted there are other reasons too that are almost beyond our control (like baby-boomer and the technology shift).  But tinkering with rates to help offset some of these things temporarily will help stabilize the economy.  This isn't socialism, or communism, or robin hood economics.  The Obama tax proposals are the result of intelligent discussions with economists who have researched this stuff for decades and are making informed decisions on how to keep the economy from crashing, and maybe even make it healthy again.

 

People should really quit trying to use cries of "socialism" and "communism" as a scare tactic because the average voter is a lot smarter than you think.  I mean, that type of stuff worked when I was in the 5th grade and would typically get a fight started, but people today a little bit more informed and know what's really going on.  So it may be worth it for people to save their breath and their dignity and come up with a better scare tactic.