Controversy over Tax Collection Reflects Uneven Distribution of Wealth in U.S.

Who is rich, and who is middle class? This is the most important question of tax collection. U.S. President Obama’s attitude is clear: Tax delineation is drawn at a household annual income of $250,000. At this, most Americans clap and cheer. Those with a household income of over $250,000 should be considered wealthy, and in all, they total less than two percent of the U.S. population. Yet these people do not think of themselves as wealthy and thus criticize Obama’s standard as having no basis in economic analysis.

Some say that Obama is learning from Clinton: In 1993, President Clinton drew the line at $250,000 per household for a tax rate of 39.6 percent. Before this, when Bush Senior was president, the U.S. drew the line at $86,500 per household for a tax rate of 31 percent. There are also some who say that Obama is hoping for some good luck, because after 1993 the American economy was good.

There is a difference between having money and being truly wealthy. There should be a difference in the way the two are treated, with an emphasis on taxing the wealthy. However, since Reagan was in power, according to tax rate calculations, wealthy Americans have been paying less and less in taxes. In 2010, the wealthiest 400 Americans payed taxes at an average tax rate of only 16.6 percent. The tax rate of the extremely wealthy was lower than that of the average person because most of their income comes from investments, and long-term capital gains tax on investments is only 15 percent. In the 1950s, 60s and 70s, the highest U.S. tax rate reached 70 percent. Even in 1986 when President Reagan was in office, the highest U.S. tax rate was still 50 percent. But in today’s America, it’s a “fool’s paradise” for the rich and powerful and the Wall Street manipulators.

For Warren Buffet and Bill Gates, a large part of their wealth comes from these taxes and can be said to be “ill-gotten gains.” On the contrary, Americans with an annual household income of $250,000 or slightly higher have a tax rate of nearly 40 percent. Thus, these Americans are not at all convinced.

Moreover, this across-the-board line at $250,000 fails to take into account regional differences. Just like China, U.S. regional economic development has its inconsistencies. Living in Little Rock, Ark., an annual income of over $250,000 is enough to make one feel a little like the master. But in New York, an annual income of $250,000 is merely considered a comparatively good standard of living.

From 2002 to 2008, the income of the top two percent of wealthy Americans increased around 30 percent, while at the same time, the income of 90 percent of low-income people dropped 34 percent. This period of time was also a period of great development for America’s capital market, yet it was at this time that the U.S. economy also started to slump. America’s economic problem is not a growth issue but rather a problem of uneven distribution of wealth. One of the important reasons why the U.S. financial crisis happened was the uneven distribution of wealth. The wealthy largely consumed luxury goods, and as a result, this led to abnormal economic development; poor people had no money to spend on consumer goods. Thus, society’s resources were used on wasteful and unstable production. Again, as mentioned earlier, since capital gains tax is much higher than individual income tax, wealthy Americans who invest in the stock market or property market can further distort normal market demand. Therefore, it is very important to understand who has money, but also to understand the distribution of wealth. This is important both for taxation and for rapid development of capital markets.

(The author, Zhu Weiyi, is a professor at China University of Political Science and Law.)