10/02/2012 03:55 pm ET Updated Dec 02, 2012

The Not-So-Great Redistribution Debate: Makers, Takers, Shakers and Fakers

Redistribution is a bad thing because it moves wealth from the makers to the takers, right? Conservatives and libertarians would probably think that way. Progressives and liberals would probably not.

This needs to move beyond an ideological or linguistic argument, however. Every now and then, facts should intervene.

A standard definition of redistribution is that it is reallocating wealth to reduce inequalities in income. The current political argument has centered on the conception that it is taking money from the "deserving" rich and giving it to the "undeserving" poor. Both the definition and the conception are too narrowly constructed and also wrong-headed.

As David Firestone points out in his September 19 Taking Note blog for the New York Times:

"...the government has long redistributed wealth and... the country expects it to do so. ... Government takes money from those who have it and uses it for the common good, whether that involves building roads or submarines, or handing some over to those who are desperate."

Harold Meyerson in his September 25 Washington Post article broadens the scope of redistribution beyond government-supported programs observing that " redistribute wealth continuously" as do "...Rules made by 'pro-market' governments."

We agree with Messrs Firestone and Meyerson and would expand the construct even further. The truth is that, in the United States, redistribution is a pervasive fact of life that permeates the American economy and rewards some more than others. Surprisingly, the 1 percent and the "other 47 percent" -- not just the "47 percent" -- are major beneficiaries of governmental largess and our many varieties of redistribution. Governmental entities, large corporations, farms, small businesses and all forms of organizations also benefit from the manner in which dollars and deductions are allocated to enable the increasing or sheltering of wealth. Let's look at some examples and evidence.

The government doesn't just do things to support the "desperate." It delivers exemptions, benefits and public goods of some type to all citizens. Michael Grumwald captures that condition beautifully in his feature article for the September 17 issue of Time Magazine aptly titled "One Nation on Welfare. Living Your Life on the Dole" Near the beginning of his article, Grumwald observes, "My handouts are not the handouts to the poor that fuel the America's political culture wars..." He goes on to cite his various "handouts" including tax deductions for mortgage, home office, health and property taxes and federal subsidies for things such as flood insurance, transportation systems and beach preservation.

Jared Bernstein reinforces Grumwald's perspective in his September 20 The Huffington Post blog when he writes;

"We almost all 'take' at some point and 'make' at another. Medicare and Social Security are social insurance programs to which we contribute during our working lives and receive benefits from in retirement. Are the beneficiaries of these programs makers or takers?"

So, when it comes to redistribution, it appears that we're all in this together -- makers and takers. Actually, we are not -- there's a third category and that is what we call "shakers." The shakers are those people at the top of the economic food chain who have the rules tilted in their favor.

The best example of this favoritism is the manner in which capital gains are treated for taxation purposes. Today, the top federal rate for capital gains is 15 percent and in several states capital gains are not taxed at all. In contrast, the top marginal federal rate for an income earner is 35 percent. There probably aren't many income earners who pay that 35 percent. But it is easy to see whom the rules favor and that is the very wealthy who receive a high proportion of their wealth from capital gains.

Suzy Khimm highlights the impact of capital gains treatment on income inequality in her January 2 post on Ezra Klein's Washington Post Wonkblog. Drawing upon a report from the Congressional Research Service, she notes, "Changes in income from capital gains and dividends were the single largest contributor to rising income inequality between 1996 and 2006." That's not to say that increasing capital gains would increase the earnings of the average worker. In an economy in which the median income declined for the fourth consecutive year in 2011 and has fallen 8.1 percent since 2007, however, it becomes clear that the wealthiest among us are being rewarded rather than penalized because of the current redistribution system.

The redistribution rewards are not restricted to individuals. As David Kocieniewski reported in his Nov. 3, 2011, New York Times article:

"280 of the biggest publicly traded companies faced federal income tax bills equal to 18.5 percent of their profits during the last three years -- little more than half the official corporate rate of 35 percent and lower than their competitors in many industrialized countries."

Then, there are the billions of dollars that have been redistributed historically through the farm bill subsidies. As Robert Semple reported in the New York Times on June 2, 2012, between 1995 and 2010 about $200 billion (in 2010 dollars) was distributed. Twenty-six percent went to the top 1 percent of farms in terms of size and a mere 10 percent went to the bottom 80 percent.

Finally, there is the redistribution of federal tax dollars back to the states. Based upon a review of 2005 federal spending, in 2007 the Tax Foundation reported that there were states that got much more than their state's contribution and others that got much less than they contributed. The top five states, in order, that got the most were: New Mexico, Mississippi, Alaska, Louisiana, and West Virginia. The five states that got back the least were: New Jersey, Nevada, Connecticut, New Hampshire and Minnesota.

Even though we said finally, the list could go on virtually ad infinitum and ad nauseum -- TARP, the auto bailout, the continued protection of the banks, housing subsidies, private equity firms taking over troubled companies, offshoring, wall street gains and wall street losses. These are all forms of redistribution. Redistribution is an everyday occurrence and it is at the heart of the American political and capitalistic system.

As we said earlier, in the redistribution scheme of things there are makers, takers, and shakers. In the not so great redistribution debate, there are also fakers. They are the folks who use a "hot-button" word in an attempt to polarize voters even further and to divide rather than unite us. We need the makers and the takers. We may even need the shakers. The fakers we can do without.

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