One has to be amazed at the distorted views presented in the media and in the political arena regarding “the rich.”   But Alan J. Reynolds does provide some objective reality in his editorial, “Tax rates, inequality and the 1%.”  He first cites a statement from the Congressional Budget Office:

The share of income received by the top 1% grew from about 8% in 1979 to over 17% in 2007.

These numbers were adopted as the theme song for those who condemn the high income producers.   But not so fast “team Left.”  Mr. Reynolds asks:  Why did the [CBO] report stop at 2007?  He explains: 

The share of after tax income of the top 1% by my estimate fell to 11.3% in 2009 from the 17.3% that the CBO reported in 2007.

How convenient it is for all those at “team Left” to omit this statistic. Much of the realized income of the top 1% comes from capital gains.  In a weak economy much of this form of income dramatically decreases.  Mr. Reynolds further states:

. . .that recessions always destroy wealth and small business incomes. . . .  . . .those who obsess over income shares should welcome stock market crashes and deep recessions because such calamities invariably reduce “inequality.” . . .recessions also increase poverty and unemployment. 

In a simplistic, even crude way of expressing it, there are two segments of households in America. One group generates much of its income from salary and wages;  the other group from realized capital gains.  I recently examined the aggregate numbers.  In 2002, realized household income from all sources totaled about $6 trillion (T).  From then it increased every year until it peaked in 2007 at nearly $8.7T (1.4X).  Federal income tax and salary and wages increased at about the same rate as the realized income. 

However, realized capital gains increased from nearly $270B in 2002 to $912B in 2007 (340%).  Capital gains in 2007 accounted for 10.5% of total realized household income.  According to Mr. Reynolds, in 2007 the top 1% of income earners accounted for 17.3% of the realized household income.  And, according to my analysis, the top 1% in 2007 accounted for approximately 40% of the total amount of household income tax paid. 

Between 2007 and 2009 total realized annual income declined by more than 12%.  Federal income tax declined by 22%.  Salary and wages declined by 0.8%.  Realized capital gains declined by a whopping 73.6%, from $912B to $240.5B!  It’s not a coincidence that according to Mr. Reynolds during the same period as mentioned the share of after tax income of the top 1% declined from 17.3% to 11.3%.  Correspondingly the proportion of capital gains of total household realized income went from 10.5% to approximately 3.1%.

The best way to raise tax revenue is to have a growing and healthy economy.  The greatest number of  income tax dollars were paid during the very peak of a flourishing economy in 2007.  Increasing taxes on “the rich,” will further weaken an already ailing economy.  Decreasing the tax rates on capital gains actually encourages “the rich” to invest more, start new businesses, hire more people, and realize more income and, of course, pay more to the tax man. 

Total realized household income in America is not a zero sum game, not a standard sized pie.  It expands and contracts.  And much of this is explained by accompanying variation in capital investment and realized capital gains.