My Thoughts On The Redistribution Of Wealth In America

My Thoughts On The Redistribution Of Wealth In America

Redistribution of wealth is already occurring in the US and it has not worked. It has never worked for any sovereign country at any time in human history and it’s not working now. There is no Nirvana. There is no Utopia. There never has been and there never will be.

However, free markets and free enterprise is the best system we have to create wealth and raise the living standards for all people. The basis of the free market is the ability to create a good or service in exchange for a monetary benefit where both the buyer and seller win.

If you remove the degree of monetary benefit through taxation, you reduce the effectiveness of the free market, and subsequently reduce or stagnate the living standard for all people.

To put this into the context of redistribution already occurring, according to IRS data from 2010, the top 1% of income earners pay an average of a 24% effective tax rate. The top 10% paid an average 18.5%. However, the bottom 50% paid 2.37%. We are already distributing wealth, and it’s not working. This is already a more than fair progressive tax system.

But the argument of a redistribution of wealth always comes down to morality. The underlying question is “how is it moral for a person to make over x amount of dollars (whether its 250k or $1M) and be able to keep most of it?” The argument continues to say that “there are many poor people who could use that money.”

Of course, if you do that, the person making a lot of money has less of an incentive to create and the person receiving the wealth has no incentive to create. Redistribution erodes the incentive to create wealth. But don’t take my word for it, just look at the US Treasury Department’s data on expatriates, in other words, the number of Americans renouncing their citizenship.  In 2008, we had 231. The number almost tripled a year later in 2009 to 742. Then it doubled in 2010 to 1534 and even higher in 2011.

The numbers are small relative to the population, but you know what..if those guys are millionaires and billionaires, then proportionally speaking, that’s a lot of money leaving our country. And where are they moving to? Not the UK or other European nations, but to Asia.

In Hong Kong a person can be paying as little as 15% for income tax, and in New York it can be 40%. Many Middle Eastern countries don’t tax income at all. We should have policies that keep people and their incomes here in America. It’s this progressive tax system that has created over 600 banks in the Cayman islands. Redistribution does not work.

So how do you fix the problem?  It’s a simple solution, but hard to implement. Reduce government spending and reduce taxes for all. Give people their money to invest, create businesses, and pursue their dreams. Playing this shell game of taking money from one hand and giving to the other does not create wealth. Wealth is not a zero sum game and the basis for redistribution assumes that it is.

About The Author

Edwin is a marketer, social media influencer and head writer here at I Am 1 Percent. He manages a large network of high quality finance blogs and social media accounts. You can connect with him via email here.


32 Comments

  1. KK @ Student Debt Survivor

    I think of taxes like I think of tipping (much smaller scale, but same idea). If I go to a restaurant with a large party and they charge me an automatic gratuity (assuming I’m not going to tip on the total cost of the bill) that makes me mad and I might not tip over that amount-unless the server did a great job. If you tax me and redistribute my money I have less to give to charity and will likely give less to government supported charities (you already have my money-taxes!).

    Reply
    1. Joe Morgan

      I think that’s actually a goal of the government – reduce charitable activities. The ruling class would much rather take money that would otherwise go to charities and distribute it as they see fit.

      Reply
  2. Erin

    Agreed with much of your post except that not all expats renounce citizenship. I was a childhood expat for 8 years and I am still a proud American. And depending on the state some expats still have to pay state taxes on their incomes earned overseas.

    Reply
  3. Mochimac

    This is why when I earn a lot of money, I am okay with taxes. I know where it goes, and I’m happy to pay it (I live in Canada).

    I can see on the one side, how it feels so unfair that someone has to struggle to earn enough money to live on, but on the other side, the person who made it, shouldn’t be financially punished for being successful.

    If they earned it, they earned it. Or even if they inherited it, their family members earned it for their family, and they have a right to it.

    I think the tax system in U.S. and Canada is more than fair.

    I also see that there are jobs that many people don’t want to take on because it’s “demeaning” or “not their thing”, but if you’re struggling, you should put away your pride and get down to it.

    People think I say this just because I have a lot of money saved, but I earned every penny and I am aware of how quickly that money can disappear with bad decisions and purchases, which is the kind of thinking that got me to have amassed the amount I’ve saved in the first place.

    Reply
  4. David

    I think you hit the root of the problem right on. While I agree with the idea that increasing wealth disparity is a problem, redistribution removes incentive to improve from everyone. Taken to the extreme, it becomes even more obvious. If everybody made the same amount of money regardless of performance there would be no incentive to work harder or improve. The lure of a larger paycheck is a powerful motivation to work hard and improve.

    Personally I would be in favor of a flat tax bracket above a certain level and fewer deductions. The people who pay more in taxes right now are generally not using the services that those taxes pay for more than the lower income population (the wear and tear on roads for example doesn’t change based on how much money the driver is making).

    Reply
    1. Joe Morgan

      Wealth disparity is largely the result of “the rich” buying assets, while the poor and middle class consume debt and liabilities. Instead of confiscating wealth and giving it to those who only consume more, we should focus on education.

      Instead of stoking envy and resentment of success, we should be helping everyone succeed because 9 times out of 10, we are in our own way – we are where we are because of us, not “the rich”.

      Reply
  5. Paul @ RealtyNetWorth.com

    Best example: Tithing.

    The first 10% God gets, good times/ bad times, wealthy/ poor, years of plenty, years of little.

    Flat tax system is predictable for those paying in, and for those setting up a budget of spending.

    Reply
  6. so

    Don’t agree with a bit of this, no inclination to unpack the cherry-picking, odd reliance on facts not in evidence (“The numbers are small relative to the population, but you know what..if those guys are millionaires and billionaires, then proportionally speaking, that’s a lot of money leaving our country. And where are they moving to?”), and eliding the economic arguments for redistribution as well as the silly premise that the free market as exemplified by American capitalism is an inherent moral good.

    I’ll just agree to disagree, but leave it at this: if any of you wealth creators are feeling your incentive to create wealth stifled and want to go Galt and sell out, I’d be happy to buy whatever businesses or assets you are abandoning 🙂

    Reply
    1. iam1percent

      Never mind you cherry picking my cherry picking by not mentioning the fact that there are 600 banks in the caymans geared towards high net worth individuals.

      By the way, you couldn’t afford what I’d be abandoning.

      Reply
      1. so

        Yes, there are banks in the Caymans geared to high net worth individuals, your claim was not that they exist, but that they were “created by a progressive tax system,” a proposition you seem to think is self-evident and doesn’t require support. Off-hand, I know that some island tax havens exist only due to the fact that they don’t have to use revenue to pay for basic services, their former colonizers handle that. Otherwise, they’d be Haiti. Can’t speak to the Caymans specifically with any intelligence, but really, neither can you.

        As far as what you’d be abandoning, be real, Zuckerberg. You are barely a millionaire AND you lived at home until 26 PLUS you married into a physician’s income / lifestyle (one of the few jobs where PT work can get you a living wage), so let’s not pretend you bootstrapped your way into being some kind of mogul or that your level of wealth is exceptional for your circumstances. There’s no envy here, you don’t have anything I can’t afford.

        Reply
        1. iam1percent

          Yes, I’m sure those cayman banks are heavily used by the poor people in this country.

          So its safe to assume that when you file your taxes, you take no deductions right? And I also can presume that you send in voluntary payments to the government if you have some extra money laying around or are you just a hypocrite?

          Reply
          1. so

            Perhaps you should research before you make the “argument,” then.

            Not sure you understand what “hypocrite” means. First, I never advocated for higher taxes or greater redistribution. I think the system as-is is quite fair and it stimulates plenty of investment and wealth creating.

            Your second paragraph is entitled conservative bunkum, typical AM radio dumbtalk. Following your reasoning, if I had the exact same financial profile as you, but differing political views, I would be a hypocrite for not making extra tax payments in your mind, but your political philosophy (which, no surprise, happens to be the one that would further line your pockets if enacted), entitles you to pay only what is legally required??

            In other words, only liberals have to pay for hypocrisy-free credible speech, and conservatives are simply credible by virtue of being conservatives. That’s awful convenient logic.

            You may have some sharp things to say when it comes to personal finance for high income folks (although White Coat Investor is strong there without the odd political spasming), but the assertions you have made with respect to policy are pig ignorant and stone dumb.

          2. iam1percent

            “system as-in is quite fair and it stimulates plenty of investment and wealth creating”….and you’re basing this on what…our 1% GDP growth on average over the past few years?

            and yes, if you are an advocate of a progressive tax system where the rich pay more, and you yourself proclaim to be rich (you can buy any rich person’s assets), then yes, you are a hypocrite if you don’t pay more into the system. its not that hard to understand. and by the sounds of it, you obviously do take deductions and likely don’t pay any voluntary taxes…

        2. iam1percent

          regarding cayman banks, are you really asserting that there should be some major research study to determine who uses cayman banks? this is why your comments have no credibility. who would fund a study when the answer is obvious? do you actually think poor or middle class people use cayman island banks? Do you realize that before there was an income tax, there were no cayman island banks?

          Reply
          1. so

            No, I’m saying you are confusing causation with correlation and misrepresenting what I am saying. No one asserted that only poor and middle class folks used the Cayman banks.

            You said the progressive tax system created these banks, with no evidence other than an income tax predates the creation of the banks, of which there are presently 600. However, since there was an income tax before automobiles, telephones, typewriters, film, Coca-Cola, and indeed most of modern life, does that mean *those* are the result of a progressive tax system, too? Obviously not.

          2. iam1percent

            There are degrees to correlation (highly correlation, low correlation) usually done via a statistical method called a regression analysis. One doesn’t need to run a regression to know that cayman banks are used by wealthy americans to shelter income/wealth.

            One doesn’t also need to run a regression that there is likely a low correlation between a progressive income tax rate and the telephone, for example.

            You’re looking for information that no one is going to study, because it doesn’t take a brain surgeon to realize the high correlation.

          3. so

            Course not. There are things you just “know”, and one doesn’t need to analyze, study or find facts so long as one can throw out non-responses and assumptions. You’re talking past me and twisting yourself into a pretzel (“rates don’t matter … BUT the fact that Romney would lower rates matters…”) That being said, it’s your blog, so you are more than entitled to a wrong or misinformed opinion.

            However, it’s my hope that you don’t let that bullheaded arrogance lead you to a silly place with your investments (hedge funds? private equity? an SDIRA for rental? …might as well go long gold and seeds). I’ll pray for you.

        3. C The Writer

          Omg…can’t breathe…laughing too hard.

          Reply
      2. C The Writer

        LOL.

        Reply
  7. 30kto30million

    Nicely put article.. It seems that the North American culture is shifting towards a more of help me and give me culture, instead of how can i help myself state of mind.. The upcoming overpopulated nations in the world have million’s of people that are hungry for the luxuries and wealth that North American’s enjoy and are not afraid to work for it.. So as societies views change so will wealth move to were it can prosper, and thrive..

    Reply
  8. Anthony

    @iam1percent,

    Your interpretation of the data is flawed, so your conclusion is flawed inevitably.

    I looked at the table 1, and calculated the annual gross income per individual for the bottom 50%. And it was just under $14,000 ($944,099M / 67,516,746 = $13,983). That’s $1,166 per month before tax. There’s not a lot left after you pay the rent. How much will they contribute to the pool if they paid all of their income as tax and starve to death? It’s a fly on the wall.

    Now, do you think they enjoy being at the bottom because they’re not paying much tax and letting others work hard for them? Maybe. Or, maybe they don’t have enough money to invest in themselves to get education and get a better job? 😀

    Reply
    1. iam1percent

      On that $1,166, there is not much tax. $30 bucks actually. And you don’t know any information from the data. If that income is for 1 person, its not hard to live on it. Many people in that group are part-time workers that have to file returns. I love how people go right to the family of 4 with small children and they all end up starving to death. Typical fear mongering.

      But you miss the point. If you actually read the post, I didn’t want them to contribute more from where we are now. My solution was to reduce spending and reduce taxes for all.

      Reply
  9. Anthony

    Capitalism in America works like this.

    Publicly funded research and development (your tax money is collected by the government) goes to benefit corporations who then privatizes the technology by patenting it (no profit is shared with you) for 50 years, practically monopolizing it, long after the technology is obsolete.

    In addition, more tax is collected by you (working class) and transferred to big corporations in the form of public subsidy, bailout, tax reform. Of course, individuals get educational subsidy and various other grants as well, but it’s all at your cost (tax payers), not the corporations.

    What’s the lesson? If you want to be rich, make sure you start a business that these large corporations would LOVE to get the government to subsidize! 😀

    So there it is – transfer of wealth from the relentless poor to the rich, that’s American Capitalism for you.

    Reply
  10. [email protected]

    Love this post. I’m totally in agreement with you. Redistribution simply does not work. Capitalism does have its problems, but show me a better way. There really is none. Capitalism is ingrained in man—work hard and get rewarded, it just makes sense. Try working hard and giving it to other people who don’t want to work hard, and then see what happens. Wealthy people should not be punished for working hard.

    Reply
    1. C The Writer

      A lot of wealthy people do NOT work hard, and a lot of people work hard and get nowhere. Or did you conveniently forget that?

      Reply
  11. so

    ““system as-in is quite fair and it stimulates plenty of investment and wealth creating”….and you’re basing this on what…our 1% GDP growth on average over the past few years?”

    Basing on the increase M&A activity, recovery in housing, the giant inflow of cash into the market once taxes went up in the last two months… More historically, the last 12 years have been the least progressive in modern American history, and it shows. GDP is up only about 27% total over the last 12 years (about 2.2% a year), despite multiple tax cuts, as opposed to 37% over the 8 years from 1992-2000 (about 4% per year) when things were more progressive. I think where we are at is a good place.

    Look, if I’m a hypocrite for not making charitable contributions to the gov’t in accordance with a proposed law, then so are you. The proposed tax plan by the conservative candidate in the race proposed a tax plan that had a limitation on deductions of $17,000. Did you voluntarily cap your deductions at that level? I assume, based on the size of your mortgage, that you didn’t do that, that you instead followed the law as written despite your personal beliefs, which is what I and almost every other America does…if so, we can both (all) be hypocrites together 🙂

    Reply
    1. Mike

      Who is this “conservative candidate” to which you refer?

      Also, are you implying that the M&A activity, recovery in housing and stock market performance are not the result of the fed pumping massive amounts of cheap money into the hands of investment banks, and hedge funds?

      Reply
      1. iam1percent

        He’s referring to Romney whose plan not only capped deductions, but ALSO lowered income tax rates.

        Reply
    2. iam1percent

      But the facts show that between 1992-2000 the income tax share of the top 1%, top 5%, and top 10% were much lower than they are now even though the rates may have been higher. The bottom 50% paid twice as much (4.5% on average per year between 1992-2000) compared to now (2.4%). Rates don’t matter (because of deductions and credits). Share of income taxes paid matter…and the shift towards higher income Americans is more apparant now.

      Secondly, I’m not talking about towing a political party line. I’m asking about your personal belief which clearly is geared towards a higher share of income tax on the wealthy. My personal belief is that I should be less in taxes.

      Lastly, assuming you were right about me agreeing and following the conservative party, the candidate you refer to not only capped deductions, but he lowered the actual rate. That said, you’re comparing apples to oranges. Lower tax rate/minimumal deductions versus higher rates/more deductions.

      Reply
  12. JimL

    I agree that redistribution is not working. We continue to increase spending in most, if not all, welfare programs, yet seem to see little to no change in poverty levels. Shouldn’t we expect to see results? Meanwhile, various politicians and the media continue to vilify the 1% for not handing over more money to a system that doesn’t even work.

    Reply
  13. Virginia

    I would much rather help ten lazy people than turn my back on one person who is in true need.

    We should remember that hard work correlates with wealth, but it isn’t a guarantee.

    Reply

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