The Triumph Of "Trickle Up" Economics

This commentary was written by CBSNews.com's Dick Meyer.

The Internal Revenue Service recently released its fun-filled report on 2005 individual income taxes. The headline is that the super-rich were even more super than in any year since 1986 when the IRS first had comparable data. The news pages of The Wall Street Journal duly took note, but not many others did.

The top 1 percent of all taxpayers earned 21.2 percent of all the money that individuals in the country earned in 2005. So one-hundredth of the taxpayers earned one-fifth of all income. (The data are available here.)

To get into that top 1 percent, you must have at least $364,657 in "adjusted gross income" -- income after various deductions and corrections. You're in-pocket income would be much higher.

The only year the super-rich 1 percent did this well was 2000, when they earned 20.8 percent of what we all earned. From 1987 to 1996, by contrast, the top 1 percent never snagged more than 16 percent of total income. In some years they only took 12 percent.

You might be more startled by this factoid: the top 10 percent of taxpayers gobbled up 46.44 percent of all 2005 income. The bottom 50 percent earned just 12.83 percent. The income for the median taxpayer was $30,881, a 2 percent drop from 2000 after inflation.

That's Voodoo Economics with a heavy dose of Texas Trickle Up. Growth at the top, flat in the middle. And 2006 could have been even better for the winners.

This concentration of wealth and income is almost certainly the most intense since the Depression era. The immediate cause is the astounding boom in the financial services industry, especially the happy people in hedge funds and private equity funds, though their poor cousins in investment banking are doing OK, too. About half of the 45 new faces in the 2007 Forbes 400 came from either hedge funds or private equity.

It would be wrong, however, to demonize the Wall Street wizards. The trend of super-sizing the super-rich is deeper than that and actually began in 1993, according to the Census Departments Historical Income Tables.

From 1947 to 1992, the top 5 percent of all families never consumed more than 17 percent of the national "aggregate income." But since 1993, that top 5 percent has never earned less than 20 percent of the national bundle.

Before 1985, the middle class -- the middle 20 percent of families -- always earned at least 17 percent of "aggregate income." The middle 20 percent essentially kept pace with the top 5 percent. Since 1993, the families in the middle have never gotten more than 15 percent of the pie. This is called a trend.

Just as it would be wrong to pick on the persecuted fund managers, it would be wrong to proclaim this primarily an issue of unfair taxation.

The new IRS figures I was talking about also show that the top 1 percent of earners (the ones who snagged that 21 percent of national income) also paid 39.4 percent of all federal income taxes. The bottom 50 percent paid only 3 percent of the national income tax bill. Looked at broadly, this is more than fair, though many super-duper rich find ways of paying at lower rates than their secretaries, as Warren Buffett has pointed out.

All of the Democratic presidential candidates talk about the issue without talking about the issue. They discuss changing the tax laws, upping the capital gains rate or changing the taxation of hedge funds and private equity. These options ought to be debated, but they miss the fundamental concern, which is a matter of values and political philosophy. On those bigger issues, the Trickle Up crowd seems to have won -- not just in Washington but in the nation.

The real world triumph of Trickle Up is a victory for people who believe two things: the worst off and average in society benefit when the most well off benefit proportionately more; society should not try to alter the distribution of income and wealth that a free and fair market produces.

This is the reigning de facto political philosophy reflected in the IRS statistics.

This is not necessarily an accurate description of empirical reality; i.e., it is not at all clear that the worst off and the average benefit when the best off benefit most, and it is not universally accepted that the market is free and fair. Nonetheless, people who believe these things have won.

So who believes these things? Democrats say only Republican politicians and the fat cats they love to love. I say this is the prevailing view of both political parties and the generation of Americans who now control the major financial, political and economic institutions in our country: the baby boomers.

Tax laws, securities regulations, and eloquent office-seekers cannot prevent a macro-organism of 300 million people from doing its thing -- from rewarding those it values and even worships. That is the meaning of the statistic stating that one-fifth of the national income is acquired by one one-hundredth of the taxpayers.

We avoid the values issue when we think this historic concentration of wealth is caused by the government.

The income gap is the result of the invisible hand of the market, of countless decisions of boards of directors to increase executive pay, of pension funds to pay high management fees, of companies to eliminate pension funds and so forth. Trickle Up reflects the country, not just Washington, and not just Wall Street.

In World War II, men of every class and region were drafted, shipped out and sacrificed. As that generation seized powering America in the '50s and '60s, the spoils of postwar prosperity were distributed more evenly than wealth and income are today.

That generation -- corniness isn't always inaccurate -- pulled together to pass the landmark Civil Rights legislation of the '60s and helped bring more equal and respectful treatment to women, homosexuals and ethnic minorities.

Their children, boomers like me, rode on the educations and headstarts we were given, declared America a meritocracy and accordingly deemed ourselves entitled to our success, Patagonia fleece and a piece of the national pie our fathers and mothers thought too big and too greedy. No capital gains rate can combat the cumulative power of the kids with the chips.

Boomers in that top 1 percent are fat and happy to be there. Boomers in the middle are fat and happy to go into their boom-down years backed by Social Security and Medicare benefits their kids will never see.

Trickle Up has won. But who is taking credit?