That is what Paul Ryan, the Republican chairman of the House of Representatives budget committee, called President Obama’s new tax proposal aka the “Buffet Rule.” (Financial Times article and Fox News video). In light of this new proposal and heightened rhetoric, I thought I’d try to provide some objective context to a polarizing and heated debate.
Primer: The Buffett Rule
In case you don’t know, the “Buffett Rule” is named after Warren Buffett, the billionaire investor. He has made many pleas to congress to increase the tax rates on the wealthiest Americans to at least be as high as the rates on middle Americans. Mr. Buffett, at an effective tax rate of 17%, argues that he pays less in taxes (as a percentage of his income) than his secretary who pays roughly 30%. This is because many wealthy individuals like Mr. Buffett derive most of their income from investments which are taxed at a lower rate than regular payroll. The president’s proposal, named after Mr. Buffett, says the wealthiest Americans’s effective rate must be at least as high as the middle class.
Polls show new proposals like the “Buffett Rule” are supported by the majority of Americans. In a CNN poll from August, 63% of those surveyed “say the super committee should call for increased taxes on higher-income Americans and businesses”. In fact, the poll goes even further: “only a third say that taxes on wealthy people should be kept low because higher-income Americans help create jobs, with 62 percent saying that taxes on the wealthy should be high so the government can use the money for programs to help lower-income Americans.”
Wealth Distribution: Facing Reality
Getting beyond policies and polls, let’s look at some harder science around the core issue: wealth distribution. Dan Ariely is a renowned professor of behavioral economics and physchology. He has written written some fantastic books: Predictably Irrational, and The Upside to Irrationality (I highly recommend both). Ariely conducted a fascinating study in 2010 on wealth income equality in America. Interviewing thousands of Americans, he asked them to estimate how wealth was distributed in America and also to give their ideal distribution.
Source: Dan Ariely
To summarize some of the findings: While most respondents idealized the top quintile to own ~32% of the wealth, they estimated they actually own ~58% today. In reality, the wealthiest 20% own over 80 percent of the wealth in the US. (Bonus: the top 1% owns nearly 50 percent of all wealth). On the other end of the spectrum, the poorest 40% of Americans own just 0.3 percent of the wealth; compare that to respondents’ estimated 10 percent and idealized 25 percent.
Things get even more interesting where Ariely breaks down the respondents by income, political affiliation, and gender. The battles of Democrats vs Republicans, and poorer vs richer are much smaller than you’d expect! (For all intents and purposes we shall consider Kerry voters Democrat and Bush voters Republican.)
Source: Dan Ariely
Looking at the estimated distribution first, the variation between all of the groups is less than 5%. Give or take, we all have the same rough idea of how wealth is distributed in the US right now (never mind that we underestimate the wealthiest quintile by more than 20 percent). Within this slight variation, men estimate less equal vs women and Republicans estimate more equal distribution by a few percentage points.
But the “ideal” results is where we get a glimpse at how we think it should be. Lower income respondents (<$50k) believed the top quintile should have less of the total wealth compared to higher income respondents (>$100k). This comes as no surprise. But what is surprising is that the difference is only 10 percent. That, and even the wealthier respondents’ ideal for the top quintile is off by nearly 50 percent of the actual total wealth!
Some additional figures were recently released highlighting the vast wealth inequality especially at the short end. One in every six Americans lives below the poverty line now. This trend has been going up for the past 4 years in a row. Additionally, one of every 5 children (under 18) lives in poverty. A BBC Article outlines further statistics.
Policy is certainly not the only way to affect wealth distribution, but it seems unreasonable for politicians to be fighting vehemently against tax increases on the wealthiest Americans when we aren’t even close to how Americans (both red and blue) would prefer to see wealth distributed. This bickering and inaction is particularly disheartening given the latest statistics of poverty in the US. So how is so little getting accomplished on both sides of the aisle?
In the scientific community, conflicts of interest are taken very seriously. Anyone looking to publish must give full details into any (even remotely possible) conflicts of interest to preserve the integrity of the paper and research. Generally this would be a list of sponsors, sometimes corporate, financing the study or research. This helps foster a transparent and open community among scientists in pursuit of the truth.
This ethic has not been imbued in politics. I’ve never heard a politician listing off their largest donors at a rally, or displaying them anywhere but required by law. Since money is presumed a politician’s largest possible conflict of interest, it is worth investigating further. For the 2010 elections (off-cycle), $3.6 billion was given to politicians, PACs, etc. Out of the $3.6 billion spent, 64.8% came from just 0.04% of Americans. With about 90 million citizens voting in last year’s election, that 0.04% is just 36,000 people. These statistics are form the CNN Money Article: Starbucks CEO to DC: You’ve Been Cut Off.
So are Obama’s new proposals “class warfare”? No. This kind of bombastic language does little but stir up the base and make the road to compromise harder. If only our politicians just looked at the data… I hope this post allows you to step out the fray for a moment and reflect on the facts I’ve presented. If you found any of these data compelling, I encourage you to share it with your friends.