The U.S. middle class is still incredibly wealthy by international standards.
- By Charles Kenny<p> Charles Kenny is a senior fellow at the Center for Global Development, a Schwartz fellow at the New America Foundation, and author, most recently, of Getting Better: Why Global Development Is Succeeding and How We Can Improve the World Even More. "The Optimist," his column for Foreign Policy, runs weekly. </p>
After 30 years of greed being good and rising tides lifting all boats, inequality — or "class warfare," if you prefer — is back on the political agenda.
The Occupiers who camped out in central squares from Melbourne to Oakland, denouncing the "1 percent" for its supposedly ill-gotten gains, have a point: Inequality is out of control. But these mainly middle-class complainers are an incredibly coddled bunch by any international reckoning. This is good news, because we’re going to need to tax them more if we’re ever going to solve the world’s real inequality problem: the estimated 900 million people who live on less than $1.25 a day.
First things first: America’s rich are really, really rich. U.S. Census data suggest every man, woman, and child in the top 1 percent of U.S. households gets about $1,500 to live on each day, every day. By contrast, the average U.S. household is scraping by on around $55 per person per day. But the global average is about a fifth of that.
So by global standards, America’s middle class is also really, really rich. To make it into the richest 1 percent globally, all you need is an income of around $34,000, according to World Bank economist Branko Milanovic. The average family in the United States has more than three times the income of those living in poverty in America, and nearly 50 times that of the world’s poorest. Many of America’s 99 percenters, and the West’s, are really 1 percenters on a global level.
Nor did the Western 99 percent "earn" most of their wealth, any more than the top 1 percent "earned" theirs. It’s the luck of where you’re born, according to the late Nobel Prize-winning economist Herbert Simon, who estimated that the benefits of living in a well-functioning economy probably account for 90 percent of individual income. "On moral grounds," he wrote, "we could argue for a flat income tax of 90 percent to return that wealth to its real owners" — i.e., everyone else in the country. That radical suggestion makes the Occupy Wall Street crowd look like a bunch of free-market libertarians.
Western middle classes actually get back a good deal more from government than they pay in. Political scientists Vincent Mahler, David Jesuit, and Piotr Paradowski examined the benefits — from pensions to child welfare payments — that taxpayers, rich and poor, in 12 European countries and the United States received. They found that the middle 60 percent of the population had a larger income share after taxes and transfers than before. Thanks to the good folks at the Internal Revenue Service, the broad slice of the U.S. middle class gets 3 percent more of the income pie after taxes and transfers. And that doesn’t account for a range of state subsidies for public goods like colleges and universities that disproportionately benefit the middle classes.
Billionaire investor and philanthropist Warren Buffett thinks he has a plan to right the ship: tax people making $1 million a year at 30 percent and those making $10 million at 35 percent. But that’s not going to cut it. A 30 percent income tax for 2008’s top 1 percent would have raked in $281 billion for the U.S. government — still not enough to plug the $400 billion-plus deficit that year. Plus, taxing the West’s obscenely rich to help a Western middle class that is merely very rich doesn’t seem like the highest of priorities, frankly. We need to deal with inequality all the way down to the bottom of the income pyramid, for everyone’s sake.
IMF research suggests that countries with high levels of inequality are far more likely to fall into financial crisis and far less likely to sustain economic growth. But this is not just about taxing the richest 1 percent to help the middle 60. It’s about taxing the middle 60 to help the bottom 20. And ensuring that rich and poor alike worldwide have access to basic health care and education, with their well-documented effects on income and productivity, will work to the benefit of the Western middle class. If Americans and Europeans want to export their way out of recession, they need rich consumers elsewhere.
So stop whining, Occupiers. It is high time for the richest 1 percent to help the rest catch up. But don’t fool yourself — if you live in the West, you probably are that 1 percent.