A long rebuttal to a short meme
It’s hard to elaborate on tax policy in only 5 sentences
In one of my English classes after I ought to have known better, my teacher gave back an A-grade paper with the note, “Please don’t have any more paragraphs longer than a page.” I had been taught “the 5-paragraph essay,” so by gum, I was going to use only five paragraphs. Clearly, however, it can take more words than that to explain what you mean.
All that to say, I know a meme is necessarily abbreviated. You can’t capture much nuance in 5 sentences. But if you share a meme that implies something too strongly, I might write a rebuttal. Several of my friends have shared the following meme, and I think they do appreciate that real life has more nuance — but now I’ll have something to post in reply.
Overall I get a very anti-welfare (i.e., money transfer) vibe. I want to examine whether the implications of the sentences hold true.
3. The government cannot give to anybody anything that the government does not first take from somebody else.
Sentence 3 is easy — it’s mostly true. The US government does actually create some money out of thin air (through fractional reserve banking [i]), but for the time being, what the government spends must first be collected as taxes, tariffs, or fees.
Still, words matter.[ii] Is the government taking, as the meme states, or are people contributing for the benefit of society, including their own? And is the government “giving to people,” or “providing what citizens paid for”? I wrote a whole post about the benefits taxes buy. (In addition, government has expanded dramatically since 1776; for an entertaining overview, I highly recommend the book Americana.)
Working hard… or hardly working?
2. What one person receives without working for, another person must work for without receiving.
Sentence #2 is true on a trivial level. Some households get more assistance from the federal government than they pay in taxes — money they didn’t work for. Similarly, net tax I pay means I technically didn’t receive some of my paycheck.
The meme implies that such money transfer is inherently undesirable, but the poison, as they say, is in the dose. How many people are actually receiving money without working for it, and whose money was it?
Who receives benefits?
The US offers several kinds of social safety net assistance, including food vouchers, health insurance, and rental subsidies. Another way the US offers assistance is through tax credits, which come out of income tax that would otherwise be owed and may be fully or partially refundable.
Even with a negative income tax rate, most households still contributed payroll taxes, and everyone ends up handing over some sales and excise taxes, which can lead to some lower-income households paying a higher overall effective tax rate than people with slightly higher incomes. Of those households who pay neither income nor payroll tax, most are retirees with income too low to to owe taxes.
So the only people who receive government money without working for it are the few low-income households that have a zero or negative tax rate; in a given year, they get more money than they owed (below the horizontal axis in the following graph).
But those households are far from the only households getting federal assistance. I’ve written about tax expenditures (money “spent” by the government in the form of reduced taxation) before, but I updated numbers. The chart below shows the 2022 outlays of four direct assistance programs alongside the cost (in lost tax revenue) of four popular categories of tax deductions.
As you can see above, the tax deductions for charitable contributions, retirement savings (e.g., 401(k) pre-tax contributions), home ownership (e.g., mortgage interest deduction) and non-taxed benefits (such as money paid by the employer for health insurance) cost the government just as much as poverty-reduction programs. Total income security spending in 2022 was $8.8B, whereas total other tax expenditures exceeded $9B. The difference is that tax expenditures disproportionately benefit the wealthy.
We should be asking, “Who gets any government money?” because the answer is… all of us.
Who is working but not receiving?
But there is a group of people who don’t work for their money. It’s the 0.1%.
The richer a household is, the greater the share of their income that comes from investments (“Net Capital” in the following chart). When you get to the 0.1% — the richest 16,000 or so households in the US — more of their money comes from investments than from labor.
Households with more income do pay more taxes, in both absolute terms and effective tax rate, than lower-income people. But did they work for that money from which they’re paying taxes? Definitely not all of it. They even pay a lower tax rate on the money they don’t work for — capital gains. Why? Because the 0.1% make the rules.
So we all get government money, a few people receive a little more than they pay, and a few people get a lot of money without working, from which they pay less than those who earn wages.
A dollar is a dollar, except when it’s not
1. You cannot legislate the poor into prosperity, by legislating the wealthy out of prosperity.
We’ve shown above that everyone gets assistance from the government, and that most of that money comes from higher-income households, many of which earn a lot of it without working. Sentence #1 suggests that such money transfer is a zero-sum game. Again, that’s trivially true at a dollar amount, but the same amounts have different value to different people.
For example, before we had kids, my husband and I comprised a two-tech-income household. We paid more in income taxes those years than a beginning teacher in our area would have earned in salary! Clearly, a $3,000 tax credit would help the teacher more than my family.
Furthermore, prosperity can have quite a different meaning to different people. Below what level of wealth would you consider yourself not prosperous? If you were making that amount, how much money would help you? And most relevant, what level of taxation could actually legislate the wealthy out of prosperity?
The above chart looks like a pretty standard curve. (Net worth includes home equity, retirement savings, and the value of other assets, minus debt.) Perhaps not surprisingly, the poorest households in the US have a negative net worth, which means they owe more than their assets are worth. As you move up the wealth chart, the 50th percentile household — exactly in the middle — has a net worth of just under $200,000, while the 90th percentile household has a net worth of around $2M.
But to show this gradation, I had to eliminate the top 10% of households, because when you include them, and especially the top 0.1%, the scale of the graph flattens out the differences between the 1st and 90th percentiles to almost invisible. That’s how much more the top households are worth than the other 99.9%.
I consider myself quite prosperous: I’m able to buy pretty much anything that my frugal younger self would have wanted (look, I didn’t dream of yachts). If I had $100M[iii] (that’s $100,000,000), I could live my wildest dreams. I could spend a million dollars or more, every year, for the rest of my life! By any measure, $100,000,000 is a lot of money. Yet it’s pathetically small in comparison to the wealth of the richest people in America.
The picture above shows just how small $100M is compared to $100B — and Elon Musk has nearly twice that much. (His net worth was $180B at the time of this writing.)
To see if we could legislate him out of prosperity, consider Elizabeth Warren’s proposed wealth tax, a far-left policy proposal. It would charge 2% annually on wealth over $50M and an additional 4% (for a total of 6%) annually on amounts over $1B. She estimates that it would raise $375 billion a year. That sure would help balance the budget.
To try to explain just how much money Musk has, he could pay Warren’s wealth tax every year for 20 years, and even if he never earned another cent, he would still be worth more than $50B (yes, fifty billion) dollars. He would still be among the 25 richest Americans.
Of course, that much wealth is likely to grow. If he invested in a low-cost diversified index fund [iv], he’d be likely to make around 8% a year (the average annual return of the broad stock market over time is 6–8%[v]). At that rate, he would end up ahead in 20 years even after he paid $254 billion in taxes. Yep — he’d still end up with two and a half tennis courts of money, even after contributing that same amount to society. And there are 24 other households that could do the same.
Thus I submit that you absolutely could legislate the poor into prosperity without the wealthy even noticing.
Multiplication and Division
4. You cannot multiply wealth by dividing it.
Honestly, I’m not sure what sentence #4 is trying to say. At face value, it’s incorrect — all investing advice expounds on the virtue of diversification (“dividing”). It’s probably implying that if you “divide” people from their wealth (by taxing?), they won’t keep making money? As Warren Buffett famously wrote, however, no one turns down a good profit because of having to pay taxes on it. Especially when the effective tax rate is so low (the difference between the left green bars and the right purple bars in the graph below).
Taxing wealth at a higher rate definitely can have a diminishing return, but we could easily increase that tax rate on the wealthy with no danger of their not getting anything they worked for (see again the graph above comparing income to taxes).
We all benefit when everyone has the chance to prosper, and conversely, an individual’s prosperity owes a lot to the benefits we all share. This is a topic that deserves its own article, but here’s my quick primer. Could the Walton family have built Walmart without a nationwide interstate highway system (funded 90% by the federal government) enabling them to supply stores? Could Bill Gates have earned his fortune without a functioning electrical grid that powered every home in the nation? Companies have been able to grow and generate wealth because America has been politically stable[vi] internally, militarily powerful externally, and committed to the many laws that enable economic growth — from keeping the currency value stable to protecting intellectual property.
There’s plenty of room to debate how much, from whom, to whom, when and how to collect and distribute money, but contributing to the good of the society that enabled one’s success seems like multiplying to me.
You pay for what you get
5. When half of the people get the idea that they do not have to work, because the other half is going to take care of them, and when the other half gets the idea that it does no good to work, because somebody else is going to get what they work for, that is the beginning of the end of any nation!
Finally, sentence #5 might well be true if it ever actually happened. The closest example I can think of is communist East Germany, but it was reunited with West Germany before it could collapse.
The US is nowhere near half our population thinking they don’t have to work — because they are working. A household’s effective tax rate goes up as income increases (or at least as wage income increases), but it’s never higher than 25% (see the first graph). I don’t know of anyone who’s declined a raise or to make a profit because of a 25% tax rate.
But I can think of another thing that would also begin the ruin of a nation: if its people stop contributing to the common good. People paying taxes are investing in both the common good and themselves, both directly and because we all do better when anyone does better.
If you’re worried that helping the poor could bring down our country, rest easy. Income security represented less than 9% of the 2023 federal budget, and as mentioned above, most recipients are workers or former workers. We pay more in interest on our debt than we spend on helping the poor, and the total amount we give the poor is less than we give the wealthy through tax expenditures not represented in the budget.
While you might hate the idea of someone getting “your” money, remember that you’re getting their money, too. And if your taxes are too high, take a look at that net worth chart again and ask yourself who should pay more taxes to reduce your burden.
Can you think of a reason not to share this? Neither can I. 😉
What does an A student do after she graduates? Write persuasive essays for fun, apparently. If you enjoyed this article, consider reading more in my publication. I promise there are no page-long paragraphs.
[i] If you want to watch me get really irate, talk to me about creating money. Here’s short explainer on fractional reserve banking. It’s asinine that we let commercial banks and the financial industry create money and gather the profit. We could instead create it by spending it — for example, by using it on infrastructure projects — which puts the money into circulation just the same, but gets goods and labor out of it instead of letting banks gather the value.
[ii] Taxes sound like a burden if someone is yelling about “tax relief,” but the distribution matters more when people call for “tax justice.”
[iii] Barenaked Ladies, meet inflation.
[iv] Which I realize he wouldn’t do, because that wealth isn’t all in cash, and his stock growth is part of what’s propelling the growth of the index funds, but I digress.
[v] Of course, our economy can’t keep growing at the rate it has been without some ecological and/or humanitarian crises, so the historical growth rate shouldn’t be counted on long-term. But it’s probably relatively accurate over the next ten years.
[vi] It might not feel that way, but we lasted over 200 years without any attempt at a coup, and in the end, power transferred peacefully despite the violent events of January 6, 2021.
