One of the liberal’s high economic priests is a columnist for the New York Times — Paul Krugman. I seldom sally into critiquing his economic theories, since other NRO authors do a credible job of this. However, after coming across one of his editorials in my local newspaper, and after reading it a couple of times, I could stay quiet no longer.
The title of this editorial, “GOP favors tiny, wealthy minority vs. everyone else,” sets the stage for Krugman’s proof statement for such an outrageous accusation:
The lion’s share of the benefits from recent economic growth has gone to a small, wealthy minority, while most Americans were worse off in 2005 than they were in 2000.
First of all, 2000 marked the peak of an economic and technology boom wherein people earned enormous amounts of ordinary income and capital gains. For example, a friend of mine had earnings of $150,000 in 2000, but he also cashed in his stock portfolio that year and garnered $250,000 in capital gains. His total annual earnings are nowhere near this level today, even though his earned income is higher. In other words, his capital gain was a type of lottery winning that doesn’t occur every year.
To use a record year as the benchmark for measurement rather than an average period undermines Krugman’s whole argument. Also, what is the basis for his growing inequality assumption? Is he referring to levels of income? Wealth? After-tax income?
Some of Krugman’s inequality cohorts prefer to use median or average family income in presenting their arguments. But what further undermines any of these positions is that we have added millions of people to the list of employed, most of whom are at the lower end of the income scale. Being a math major, such additions would tell me that the traditional “average” income level would fall. Seven million new workers are better off than if they didn’t have a job. How do the redistributionists argue against that economic gain?
The Treasury reports that the majority of American families with incomes below $40,000 pay no income taxes at all today, while many in this group receive welfare subsidies. According to Krugman, “Now the rich are getting richer, but most working Americans are losing ground.” In a booming economy when global wealth is growing, I find it difficult to believe that “most” working Americans are losing ground, especially when many of them pay low or no taxes and employment is at record levels.
The IRS provides more evidence of this. In 2000, the share of total income earned by the wealthiest 1 percent increased to a post-WWII high of 20.8 percent. During the first four years of the George W. Bush presidency, the income share of the top 1 percent fell slightly to 19 percent from 20.8 percent.
Then there is the tax issue. While President Bush claims his tax programs put money back into peoples’ pockets, one wonders where the government is getting all those surprisingly large pools of tax money that are reducing the federal budget deficit. Correct: The wealthy are paying more taxes. The latest Treasury statistics indicate that personal tax collections are up 12 percent while corporate tax collections are up 25 percent. In 2004, Americans in the top 5 percent of income-tax payers paid 57.1 percent of taxes, up from 56.5 percent in 2000.
If you think this one through, wealthier taxpayers are paying more taxes that help … well, you guessed it … the poor.
Krugman can’t handle the truth. In the face of these numbers, where the wealthiest are paying more, not less, in taxes, his arguments lean on percentages rather than dollars. Quoting so-called experts on long-term trends in inequality (Is there a potential bias in these studies?), Krugman repeats their claim that “the effective federal tax rate on the richest .01% has fallen from about 60 percent in 1980 to about 34% percent today.” (By the way, that number, the top .01 percent, probably refers to Bill Gates and Warren Buffett.)
There’s also a problem with the sample period used by the “experts.” The year 1980 is an interesting time to begin such a study. The stock market hit a high of 1,000 as measured by the Dow Jones (it is over 11,500 today), inflation was running at a double-digit rate, and interest rates on long-term government bonds were at 16 percent. You know, the good old times. The fall in effective tax rates pointed out by these experts also coincides with the greatest economic and stock market boom in U.S. history. Obviously, I wouldn’t attempt to draw any cause/effect conclusions here, but you could.
Let’s go back to Krugman’s thesis that the rich are getting richer faster than the less rich are getter richer. So what? Maybe they earned it. Maybe they made good investment decisions. Maybe they work 60 to 70 hours a week. And maybe, because of their efforts, they are the ones paying all those additional taxes.
And who benefits from all those tax payments? Not the rich.
President Bush had the gumption to cut taxes twice in his first four years. Opponents such as Paul Krugman claimed the tax cuts wouldn’t work and that America would suffer as a result. We have seen, however, just how tax cuts can provide better-than-expected economic growth and increases in total U.S. wealth (currently at record levels).
Krugman writes, “We’ve got the arguments, and the facts, to win this debate.” Voters going to the polls in November should recognize that Paul Krugman represents the New York Times and other redistributionist enthusiasts. If, as he says, they will win this debate, you should ask: “What does their winning do for me?”
— Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc., and principal of Victoria Capital Management, Inc.
