Chapter 7: The Myth of the Makers and the Takers

WHO ARE THE MAKERS AND THE TAKERS?

America has always had its makers and takers. The makers are those who pay more in taxes than they get in government benefits. The takers are those who get more in government benefits than they pay in taxes. And, given wealth and income concentration at the top, the ranks of the takers are growing while the ranks of the makers are dwindling.

Paul Ryan, former Speaker of the House of Representatives, deserves much of the credit for popularizing the terms “makers” and “takers” although he later thought better of it. In 2009 the Tax Foundation published a study, Special Report 172, pointing out that a majority of Americans are getting more out of government than they pay in taxes. In 2010, Ryan, picking up on the Tax Foundation study, warned that “right now, about 60 percent of the American people get more benefits in dollar value from the federal government than they pay back in taxes. So we’re going to a majority of takers vs. makers in America and that will be tough to come back from that.” Repeating his warning a year later in 2011, Ryan again warned that “we’re getting to a society where we have a net majority of takers vs. makers.” If anything, the Tax Foundation study understated who gets what from the government and who pays for it.

Today, many upper middle-class Americans believe that they are makers because they pay what they think is a substantial amount of income tax and believe that most low-income Americans who pay little or no income tax and get stuff like food stamps, Medicaid, and education loans from the government are takers. This belief underlies Mitt Romney’s campaign comment in 2012 about 47% of Americans living off of the other 53%. This is also like the myth common among many upper-income Americans who receive Social Security and Medicare—that they paid for those benefits. The harsh fact is that almost all Americans, including most upper middle-class Americans, are takers, and only a very few of the wealthiest and highest income Americans are makers.

Economic Forces at Work

Over at least the last two generations, an intensely competitive global economy, automation, and aging demographics have all joined to set in motion the following forces:

• The global economy has caused (1) the wages of ordinary American workers to fall closer to the wages of low wage foreign workers and (2) the wages of high skilled workers all over the world to increase dramatically.
• Technology has made (1) most non-technical skills increasingly less valuable and (2) most technical skills increasingly more valuable while also making such skills subject to the ongoing risk of obsolescence.
• Advances in medicine and public health have extended the life span for most Americans which has resulted in a growing number of retirees relative to a shrinking number of workers.

Almost all ordinary workers, joined by a growing number of extraordinary workers, have fallen, and continue to fall, from the ranks of the makers. Given globalization, technology, and demographics, few ordinary takers will have the ability to become makers, but many makers will be at risk of becoming takers if their skills become obsolete. Workers with ordinary skills and workers with extraordinary skills in danger of becoming obsolete can look forward to a future of anxiety driven by job insecurity. Not only do these forces show no sign of subsiding, but each of these forces appears to be accelerating. A growing imbalance between makers and takers, and a growing anxiety in both makers and takers about their futures, will affect how the tax game will be played over the next few years.

How to tax the makers and takers for the purpose of strengthening the middle class depends on an understanding of the following:

• (1) The necessity of granting increasing benefits to a growing number of takers, (2) taxing a shrinking number of makers to pay for it, and (3) the need to educate those of merit who lack means.
• The constraints on taxing both those with high and low incomes.

Before getting into how to tax, Americans should understand who the makers and takers are.

Every able-bodied American, including each man, woman, and child who becomes an adult, owes America an obligation to pay their per capita share of the cost of government, or put a better way, their share of the blessings of being an American. Sooner or later, all government debt must be paid, and someone has to pay it. To the extent that any American pays less than their per capita share of the cost of government, they get a free ride at the expense of those who make up the difference. In the world of taxing, it is those who get a free ride that are the takers. Most Americans, however, believe that taxes should be based on the principle of one’s ability to pay in that someone with a $1,000,000 income should pay more taxes than someone with a $20,000 income. The ability to pay principle inevitably results in those with higher income paying more taxes than those with less income. There is no escaping the fact that the ability to pay principle both (1) redistributes after-tax income from the well-off to the less well-off and (2) has made America a land of many takers, and very few makers.

Focusing exclusively on tax issues, makers pull the wagon and takers ride in the wagon. To make the wagon roll faster, makers should be encouraged to make as much money as possible. A wagon that goes nowhere helps no one. Unless makers make a lot of money, there will not be enough tax revenue for the wagon to roll fast enough to take America where it needs to go.

Aside from taxes, virtually every American takes from the government in one way or another. Takers include, among others, the following: retirees and their non-working spouses who receive benefits from Social Security and Medicare; many unemployed workers who receive benefits from unemployment insurance; many of the poor who receive health care benefits from Medicaid and/or food stamps; young adults who receive loans for post-secondary education; and other individuals who qualify for hundreds of miscellaneous benefits of one kind or another from the government. Most of these benefit programs have been around for several generations and have become an integral part of American life.

To be a maker, an individual must be able to show that (over their lifetime) they have paid or will pay taxes in an amount not less than the sum of (1) their per capita share of the general cost of government (exclusive of the cost of Medicare and Social Security) and (2) the amount of benefits that they have received and will receive from government. Without a personal audit of what each individual American has paid to and gotten from the government, it is difficult to sort out exactly who the makers and takers are. But, by looking at budget and tax data, a clear picture emerges as to who does or does not likely qualify as a maker.

THE MAKING SIDE OF THE LEDGER

Children grow up, go to work, and pay taxes; both married spouses for the most part now work and pay taxes as couples; and those few non-working spouses are entitled to a half share of their working spouse’s taxes on their earnings in determining if they are a maker or taker. Therefore, to qualify as a maker, all able-bodied Americans should pay (over their lifetime) their per capita share of the cost of government.

The federal personal income tax pays for about 75% of the tax revenue needed to pay for the costs of government other than Social Security and Medicare. The remaining 25% of the costs of government is paid primarily from the corporate income tax, the estate tax, excise taxes, and miscellaneous taxes. Given wealth concentration, few Americans below the top 10% in income and wealth own significant amounts of stock or bear any of the burden of the corporate income tax, and no Americans below the top 1% in wealth bear any of the burden of the estate tax. Almost all Americans, rich and poor alike, pay some excise taxes and some miscellaneous taxes, but these taxes account for very little of the overall cost of government.

Except for the personal income tax, only a very few Americans pay enough other federal taxes to make a dent in their per capita share of the cost of government. As a practical matter, then, only a very few very well-off Americans have a decent shot at paying their per capita share of the cost of government, and many of those very well-off Americans also take quite a bit from the government.

The Tax Test for Qualifying as a Maker

Table VI-1 shows that the per capita cost of government, exclusive of Social Security and Medicare, has averaged $6,168 over the last 31 years. All Americans have a responsibility to pay for America’s bills, and to the extent that any American does not pay their per capita share, some other American must take up the slack.

Assuming a person lives a natural lifespan of 78 years, then that person’s per capita share of the cost of government over their lifetime would be $481,104 ($6,168 x 78), and assuming that same person has a working life of 56 years, then that person would have to pay an average annual personal income tax of $8,591 ($481,104/56) to pay their per capita share. Since averages are only averages and many Americans will not live their full normal life span much less work for a full 56 years, the per capita share of the tax burden for those Americans who do have full life span and working life will be significantly higher than the average $8,591. Although it is difficult to know exactly what the annual per capita personal income tax share is for those who are lucky enough to live a full 78 years and diligent enough to work for a full 56 years, it is a good bet it is well over $10,000.

Very Few Makers

As Table VI-2 shows, only very few Americans pay enough taxes to qualify as a maker.

Assuming that the annual per capita tax share for each working American is at least $10,000, a taxpayer who lives a normal lifespan and is able to work for their entire working life of 56 years would have to average being in at least the top 25% of taxpayers every year for 56 years. Since this applies to all Americans, any couple in which one spouse does not work, the other spouse would have to make up for the taxes not paid by the non-working spouse. Given the taxes paid by the various taxpayer income categories, as shown in Table VI-2, only those whose average incomes, over their entire working lives, is above the top 25% have any hope of passing the tax test to qualify as makers.

All Americans, including non-working spouses, ought to keep track of how much they pay annually in personal income taxes, and if they do not average at least $10,000 in 2009 constant dollars, then they flunk the tax test and are takers. It is only an educated guess, but probably less than 5% of all Americans can pass the taxing test to qualify as makers.

THE TAKING SIDE OF THE LEDGER

Almost all Americans, rich and poor alike, are takers from government in that they get government-paid benefits out of Social Security, Medicare, and Medicaid, and also benefit from a grab bag of hundreds of government subsidy programs such as agricultural subsidies, food stamps, small business loans, education loans, and unemployment insurance. All Americans (regardless of income and wealth) who participate in Medicare and Social Security take more, and sometimes much more, out of these programs than they pay in social insurance taxes. The Social Security and Medicare taxes paid by almost all beneficiaries amount to only a pittance (for high-income taxpayers, a fairly large pittance, and for low-income taxpayers, a small pittance) of the benefits they receive.

Unless an individual passes the tax test with a very healthy surplus, their participation in Social Security and Medicare almost certainly guarantees their falling into the ranks of the takers—BENEFICIARIES OF REDISTRIBUTION. Only very few Americans, probably less than 3%, can pass both (1) the tax test by paying more than their per capita share of the cost of government and (2) the taker test by taking less from the government than they pay in taxes.

A Nation of Takers and a Nation of Contributors

Reconciling the making and taking sides of the ledger thins the ranks of the makers to only very few Americans, leaving the remaining 300 million or so down amongst the takers. Many upper middle-class Americans are takers, a humbling fact for many high-income Americans. Another name for maker is “redistributor”, and another name for taker is “redistributee.” So, America turns out to be land in which it is highly likely that over 97% of all Americans are redistributees when it comes to counting how much money they put into paying for the government against how much they take out.

Regrettably, with about 300 million Americans on the take in terms of getting more money from the government than they put into it, it falls on America’s millionaires and billionaires to make up the difference. America would be better off if those 300 million Americans had sufficient incomes so that there were many more makers and many fewer takers, but capitalism in today’s technological and global economy dictates otherwise. For America to be economically and politically healthy, it needs a growing number of makers and a shrinking number of takers. Until income disparities begin falling, more, not fewer, Americans will be takers.

All Americans should acknowledge what should be obvious that being a taker for tax purposes does not mean that a person does not contribute to making America great. While the investments made in the economy, the taxes paid, and the unique skills contributed by the makers all are essential to keeping America strong, so too are the contributions made by the vast majority of the 300 million takers.

Making and taking (in terms of taxes) is an income and wealth matter and ignores individual merit, good and bad. Many makers have money because of luck or happenstance instead of merit, and apart from paying taxes, they do little to make America better. Many takers, however, exert extraordinary effort in applying themselves in a variety of ways other than paying taxes and make America much better. Individual industry, effort, and honesty, on the one hand, and laziness, folly, and dishonesty, on the other hand, are not proprietary to either makers or takers. Apart from makers and takers, America needs as many individuals of industry, effort, and honesty as it can muster and should do all it can to encourage those who possess these traits.

Millions of takers make extraordinary contributions to America by (1) being part of a workforce that attracts global capital to America to produce goods and services, (2) educating (at the public school and higher education levels) the American workers of the 21^st century, (3) making technical, scientific, and medical advancements that lead the global economy, (4) creating jobs through innovation and entrepreneurial risk-taking, (5) soldiering in the world’s strongest military, and (6) accomplishing many other charitable, social, educational, and artistic activities that enrich a society. Not being a multi-millionaire or billionaire does not mean an individual American does not make an extraordinary contribution to improving America.

Many more millions of takers make ordinary contributions to America by doing the everyday jobs that someone has to do, paying as much (and sometimes more) in taxes as they can afford, doing the soldiering that keeps America safe, and providing a mass consumer base that makes it profitable for well-off capitalists to produce, sell, and distribute goods and services. For someone to be extraordinary, many more must be ordinary, and without the ordinary, America would not work. Imagine a world composed solely of wealthy, industrious capitalists—there would be no one to produce and consume their goods and services. The world will not work without ordinary folks.

Although ordinary Americans are not going to become rich unless they win the lottery, ordinary, hardworking, law-abiding Americans do deserve a decent standard of living. In contemporary America, a decent standard of living for these Americans means a reasonably comfortable retirement, affordable health care, and the opportunity for their children to get the post-secondary education they need to become productive members of America’s workforce.

Siring and parenting America’s extraordinary contributors and makers is among the most important contributions that ordinary folks can make. At any point in time, it is likely that most makers, and most of those who make extraordinary contributions, are the children of ordinary parents. There is no reason to suppose that any of this will change. Viewed in strictly economic terms, today’s takers are incubating most of tomorrow’s makers and extraordinary contributors, and threatening the success of the incubation process by lowering the after-tax standard of living of millions of ordinary takers threatens America’s future.

The Necessity of the Government Helping the Takers

For the last two generations, market forces have concentrated wealth and income at the top so that only very few exceptional-income Americans earn enough to pay their per capita share of the cost of government much less save for their retirement or pay for the post-secondary education of their children. Without help (another name for redistribution), very few above average-income Americans can afford to pay for their children’s post-secondary education, much less their retirement and medical care.

America depends on takers; takers depend on government help; and for takers to get what they need to keep America working, the makers must pay for it one way or another. Without government help, most ordinary Americans will not have a middle-class standard of living enough to live the American Dream. It is a brutal fact that America will not work unless it taxes its very few makers to help its many more takers. In doing so, however, America cannot tax its makers so much that they lose their incentive to keep on making, and America must create and sustain a capitalistic market that enables its makers to be as productive as possible.

How Not to Help Takers: Jimmying Market Forces

The government could jimmy market forces for the purpose of redistributing market income and wealth more broadly so that more Americans can pay for their children’s post-secondary education and their own retirement. Erecting trade barriers to insulate American workers from competition from cheap labor and businesses from foreign competition, liberalizing labor laws in favor of unions that lead to unproductive work rules, restricting legal immigration, relaxing patent protection, mandating that businesses provide more retirement and health care benefits to workers, forcing business practices that favor low-skill labor over automation, and a host of other efforts that meddle with market forces would all reduce the disparities in the incomes and wealth of Americans.

Each of these actions would, to a greater or lesser extent, redistribute income and wealth without increasing government spending. The absence of government spending, however, does not mean that these actions would be cost-free. Instead of these costs burdening the government’s balance sheet, these costs would burden the balance sheet of businesses. Increasing the cost of businesses, in turn, would slow economic growth and erode productivity. By slowing growth and eroding productivity, jimmying the market would put America on the path to economic decline–a path to nowhere for the middle class.

PRESERVING MARKET FORCES

Flawed as the working of the market is, market forces drive the American economy, and undue tampering with them can damage economic growth and harm everyone. Damaging the economy will not provide the middle class with sustainable opportunity. Jimmying market forces could provide the middle class with a higher standard of living for a time, but only a very short time. While providing the middle class with the illusion of being better off, jimmying would corrupt the market, damage economic productivity, and sooner or later (probably sooner) cut everyone’s standard of living.

Taxing (if done right) could provide the middle class with a higher standard of living but without interfering with market forces in a way that would harm economic productivity. Unlike market jimmying, taxing does not necessarily erode economic productivity by corrupting the operation of the market. Middle-class opportunity depends on preserving the free market forces unfettered by anti-competitive or fraudulent practices.

The Cost of Meritocracy & Financial Security: Higher Taxes

From America’s beginning, it has led the way toward a merit-based society that has strived to shed the cultural hobbles that favor caste or class, whether hereditary, ethnic, religious, or economic, over merit. If America ever fails to do what it takes to advance those of merit (regardless of their background and economic wherewithal), then, along with the American Dream, America will lose its vitality.

America cannot succeed unless its businesses and workers succeed, and for each to succeed, government must provide an enabling environment. There is only one source of revenue that can finance the public investments needed to provide an enabling environment for businesses and workers, and that source is taxes—higher taxes than are currently in effect.

The goal of taxing rich and poor alike should be to raise the requisite revenue.

In the wake of the Great Recession and the pandemic of 2020, requisite revenue means getting enough tax revenue to pay the annual cost of government without increasing the national debt as a percentage of GDP. The Simpson-Bowles presidential commision, in its 2010 report, “Moment of Truth,” has recommended that (in order to be financially secure) the public debt to GDP ratio should be cut from the current approximate 100% down to about 40%, where it was in 1980. So, if America is to achieve financial security, requisite revenue means that current and future taxpayers must pay increased taxes to pay not only for (1) the government they get, but also for (2) the government their forbearers got and did not pay for.

Increasing the overall level of taxes converts the tax game from a game of under-taxing everyone in which all current taxpayers win to a game in which all current and future taxpayers are at risk of paying higher taxes. Once all taxpayers are at risk of paying higher taxes, the tax game descends into a zero-sum game in which no taxpayer can win unless another loses. Imagine a lifeboat with provisions for only 20 occupants but with 25 people, including 14 healthy adults, six children, and five frail, elderly occupants. Guess who will make the cut and who will not. In the zero-sum tax game, taxpayers of all income levels will have to duke it out to see who wins and who loses—a struggle that would make Darwin blush.

INVESTMENT VERSUS CONSUMPTION: THE NEED FOR BALANCE

Since investment and consumption both feed on and compete for the same national income, a perpetual tug of war exists between the two. Generally, makers are on the investment side, and takers are on the consumption side. But, it is a part of the DNA of all Americans, regardless of income, to put consumption ahead of investment. The investment/consumption tug of war complicates developing and implementing a coherent tax policy that encourages economic growth. At any moment in time, there is a finite amount of personal disposable income split between consumption and investment. Personal disposable income (also referred to as after-tax income) equals total personal income less personal taxes and is the income available for consumption and/or investment.

Income allocated to investment finances the productive resources that produce goods and services (the supply side), and income allocated to consumption pays for the goods and services produced (the demand side). Anytime either more goods and services are produced than can be consumed or demand exceeds the goods and services produced, an imbalance between investment and consumption exists. Put in the simplest terms, over-investment means factories producing goods that consumers cannot afford to buy, and over-consumption means consumers with money to buy but factories producing too few goods. An investment/consumption imbalance that tilts too far either way results is a misallocation of national income that slows economic growth.

Once taxpayers have enough income to subsist, all income thereafter can be spent on either investment or consumption. Subsistence in today’s America means more than eating enough calories to survive, finding shelter that protects against inclement weather, wearing old feed sacks, getting around by walking, and dying when getting sick. Over the years, America has chosen an increasingly expansive definition of subsistence and that is unlikely to change.

The almost universal predilection of all Americans “to keep up with the Joneses,” a predilection well understood by politicians, guarantees that consumption will almost always have the upper hand on investment. Almost always does not mean always, as proven by the Great Recession and pandemic. Periodically, unanticipated events, like the Great Recession and the pandemic, strike and upset the investment/consumption balance and wreak havoc on the economy. The Great Recession and the pandemic each ate into consumption as a result of high unemployment among middle and low-income workers while leaving plenty of investment capital to be financed from the intense growth in wealth of the wealthy over the last two generations.

The Great Recession (as shown on Table VII-3) led to an investment/consumption imbalance tilted in favor of investment.

Table VI-3 shows that in the four years following the onset of the Great Recession in 2008, (1) personal disposable income first fell in 2009 and then grew at a much slower pace than in the four years before the Great Recession, and (2) a greater percentage of personal disposable income found its way into investment and away from consumption. So, among other things, the Great Recession bequeathed an economy possessed of growing productive resources and shrinking consumption, a growing investment/consumption imbalance. This continuing investment/consumption imbalance worsened an economy ailing from high unemployment, disinflation bordering on deflation, stagnant and falling incomes for all but the top 10%, a collapsing housing market, crumbling consumer confidence, and economic uncertainty.

Excessive productive resources leads to waste, and excess demand leads to inflation. Over-investment results in factories with more capacity than needed to fill purchase orders, stores with overflowing inventories, growing unemployment, falling incomes among consumers, below average interest rates, disinflation, and economic uncertainty. Conversely, over-consumption results in factories that lack the capacity to fill their purchase orders, stores with empty shelves, inflation, an employment bubble, higher than average interest rates, and economic uncertainty. Using tax policy to encourage a proper balance between investment and consumption promotes economic growth which helps almost everyone.

Although free-market principles over time will correct the investment/consumption imbalance, tax policy can either speed or delay the correction. Tax policies that redress over-investment include (1) raising taxes on upper-income investors, and (2) cutting taxes for middle and lower-income consumers. Conversely, tax policies that redress over-consumption include (1) raising taxes for low and middle-income consumers and (2) providing tax incentives for investors to invest in new property and equipment.

All tax cuts and offsetting tax increases intended to redress the investment/consumption imbalance have the effect of putting more money into the pockets of some and taking it out of the pockets of others, creating winners and losers. Asking some to agree to take money out of their pockets and put it into the pockets of others asks a lot even if increasing economic growth demands it. Generally, tax policies that combat over-investment tend to redistribute money from the best-off to everyone else, and tax policies that combat over-consumption tend to redistribute money to the best-off from everyone else. Getting tax policy right requires detailed fact-finding by experts regarding (1) the magnitude of the investment/consumption imbalance and (2) the economic effects of the taxes chosen to redress the imbalance. Facts, not opinion, dictate whether tax policy will be successful.

Several years after the Great Recession, the economy still appeared to suffer from over-investment rather than under-consumption. Evidence of over-investment includes below-average interest rates and inflation as well as wealth and income concentrating in the top 1 percent. Further indicating that there was more than enough capital for investment, some, like former Chairman of the Federal Reserve Board, Ben Bernanke, contended that a worldwide capital glut was slowing global economic growth. Tax policies that remedy over-investment tend to redistribute money from the best-off to the less well-off. Since the best-off are the best equipped for and most adroit at playing the tax game, they hold a commanding edge in who will win. Given the ability of high-income taxpayers to win the tax game, fixing over-investment generally is many times harder than fixing over-consumption.

Makers and Takers: A Mutual Dependency

Squabbles between makers and takers are inevitable because they are each fighting over money, and that fight plays out in the tax game. Each time the tax game is played, the squabble continues with intensity relative to the stakes involved in each playing. Beyond the squabbles, however, makers and takers mutually depend on each other for the success of each.

The following are truths that should be (but all too rarely are considered) in allocating the tax burden between makers and takers:

• Capital is of no use without labor;
• Labor cannot produce anything without capital;
• Nothing can be consumed unless it is produced;
• There is no point in producing something that cannot be consumed;
• The richer the makers become the more taxes they will pay to meet the needs of the takers; and
• The richer the takers become the less in taxes the makers will have to pay.

America will always have both makers and takers, but it works best when the number of makers is growing, and the number of takers is shrinking. The primary purpose of tax policies should be to convert more takers into makers without converting any makers into takers and to make everyone richer by increasing economic growth.