The New Class Warfare

For a nation going through a period of historic prosperity, there is a remarkable amount of bitterness in the land. The latest example of it comes from the new speaker of the House, Nancy Pelosi, who told "Face the Nation" on Sunday, "We're not going to start with repealing tax cuts, but they certainly are not off the table for people making over half a million dollars a year." In the same interview, she presented a dichotomy between "tax cuts for those making over a certain amount of money, $500,000 a year" and "ignoring the educational and health needs of America's children."

It made us smile, for, by starting at the $500,000 mark, Ms. Pelosi was putting off limits — at least rhetorically — a whole lot of families on whom Senator Kerry, running for president in 2004, promised to raise taxes. "If you make less than $200,000, you'll get a tax cut under my plan," the man from Massachusetts said back in April 2004. "Let me be clear: Under my plan, 99% of American businesses and 98% of Americans will get a tax cut."

One can only wonder what will happen if the Democrats lose the presidential campaign in 2008. Will Ms. Pelosi or a new Democratic speaker of the House spare those making less than $800,000 a year? Well, don't bet on it. But one can bet on the notion that the American voter is remarkably sophisticated about this sort of thing, realizing that politicians who say they are going to raise taxes on anyone are likelier than not to raise them on everyone.

Those taking aim at the rich as targets include more than just the usual suspects in the Democratic Caucus on Capitol Hill. These columns earlier noted the backlash brewing in the New York City tabloids against this year's extra-large bonuses at Goldman Sachs. It has since spread from the tabloids to, of all places, New York magazine, which ran out a column by Kurt Andersen referring to contemporary New York as "Dickensian," full of "the conceited, unattractive rich."

The column claims that the American economic system "seems more and more rigged in favor of the extremely fortunate." America, Mr. Andersen writes, is turning into "a Latin Americanized society with a high-living, blithely callous oligarchy gated off from a growing mass of screwed-over peons." The rich, he says, have become "cartoons of swinish privilege." Well, that's a deuce of a way for Mr. Andersen to describe Bruce Wasserstein.

Mr. Andersen is following a theme of the New York Times, which ran on its front page in November a 3,000-word dispatch devoted to the idea that, as the headline put it, "Very Rich Are Leaving the Merely Rich Behind." About these complaints, in general, we can offer several observations. The first is that of all the problems the country faces, the need to even out the inequalities between those earning $400,000 a year and those earning more than a half-million a year is pretty low on the list. The New York Times itself, which has spilled so much ink on the issue, conceded as much in a recent editorial, writing, "It's hard for people flying in coach to have much patience with those in first class bemoaning their lack of a personal jet. Neither policymakers nor society at large need sympathize with the longing of millionaires to become billionaires."

Much of the data about the supposed rise in inequality is highly questionable. The Joint Economic Committee of Congress just announced that a test conducted at its request by the Census Bureau found "no statistically significant change in the inequality measure occurred between 2001 and 2005, the last year for which data are available. The measure referred to here is known as the Gini coefficient, a standard gauge of income inequality published by the Census Bureau and widely used by economists and other researchers."

The top Republican on the committee, Rep. James Saxton of New Jersey, said, "A lot has been said about income inequality, but the fact is that it hasn't changed much in recent years. Congress should consider this fact before acting on the assumption that income inequality is surging." Mr. Saxton went on to note that there is a good deal of income mobility between income groups, and that "inequality in consumption is much less than inequality in income. For example, the level of consumption in the bottom fifth is nearly twice that of income, indicating that income is not necessarily the best measure of economic well-being."

A 28-page report issued yesterday by the Cato Institute, authored by a senior fellow, Alan Reynolds, concludes that "Aside from stock option windfalls during the late-1990s stock market boom, there is little evidence of a significant or sustained increase in the inequality of U.S. incomes, wages, consumption, or wealth over the past 20 years." His analysis is too thorough to summarize fully here, but he notes that most analyses of income inequality ignore transfer payments such as the earned-income tax credit that boost the income of the poorest families. He also notes that the expansion of tax-favored savings vehicles such as IRAs and 401k accounts serves to reduce reported investment income by middle-class taxpayers, which has the effect of boosting the "apparent income share" of the richest.

Even if income inequality were rising, there would be little that Congress could do about it without hurting the economy or distorting incentives — or violating the Constitution. The top 1% of federal taxpayers, those with adjusted gross incomes above $328,049 in 2004, already pay 36.89% of the federal income taxes, while the bottom 50% of taxpayers, those with incomes below $30,122 a year in 2004, paid only 3.3% of the federal income taxes, according to the Joint Economic Committee. The top half of taxpayers ranked by income paid 96.70% of the individual income taxes paid in 2004, compared to 86.05% in 1949, 89.35% in 1959, and 90.27% in 1969.

As for bitterness and envy, these predate the Bush administration by at least a few thousand years. Formulating reactions to them has been the work not only of tax policy makers and editorial writers but of religion. It is not for nothing, after all, that the Tenth Commandment speaks not only of not coveting thy neighbor's wife, but also his house, his ox, his donkey, or anything that belongs to him. It's no coincidence that all this bitterness mongering is coming to a head as the Democrats accede in the Congress. All the more reason to remember that the right policy prescription is not to take from the rich but to empower the poor and the middle class to move up the ladder as well and aspire to riches of their own.