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The Matthew Effect and Federal Taxation

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The Matthew Effect and Federal Taxation University of Florida Levin College of Law UF Law Scholarship Repository UF Law Faculty Publications Faculty Scholarship 9-2004 The Matthew Effect and Federal Taxation Martin J. McMahon Jr. University of Florida Levin College of Law, [email protected] Follow this and additional works at: https://scholarship.law.ufl.edu/facultypub Part of the Law and Society Commons, Taxation-Federal Commons, Taxation-Federal Estate and Gift Commons, and the Tax Law Commons Recommended Citation Martin J. McMahon, Jr., The Matthew Effect and Federal Taxation, 45 B.C. L. Rev. 993 (2004), available at http://scholarship.law.ufl.edu/facultypub/399 This Article is brought to you for free and open access by the Faculty Scholarship at UF Law Scholarship Repository. It has been accepted for inclusion in UF Law Faculty Publications by an authorized administrator of UF Law Scholarship Repository. For more information, please contact [email protected]. THE MATTHEW EFFECT AND FEDERAL TAXATION MARTIN J. MCMAHON, JR.* For whosoever hath, to him shall be given, and he shall have more abun- dance; But whosoever hath not, from him shall be taken away even that he hath. -Matthew 25:29 Abstract: The "Matthew Effect" is a synonym for the well-known collo- quialism, "the rich get richer and the poor get poorer." This Article is about the Matthew Effect in the distribution of incomes in the United States and the failure of the federal tax system to address the problem. There has been a strong Matthew Effect in incomes in the United States over the past few decades, with an increasing concentration of income and wealth in the top one percent. Nevertheless, there has been a con- tinuing trend of enacting disproportionately large tax cuts for those at the top of the income pyramid. Neither economic theory nor empirical evidence supports the argument that these tax cuts increase incentives to save, invest, and work. A growing body of economic literature sup- ports the thesis that economic inequality impedes economic growth in- stead of fostering it. Furthermore, in a modern industrialized democ- racy, most of what everyone earns is attributable to infrastructure created by society acting through government. Paradoxically, public concern with increasing economic inequality is not matched by opposi- tion to tax legislation that delivers vastly disproportionate benefits to the super-rich. This Article suggests that future tax legislation ought to miti- gate the Matthew Effect rather than enhance it. INTRODUCTION The term, the "Matthew Effect," was coined by sociologist Robert K. Merton in 1968 based on the passage from the Gospel of Matthew * Clarence J. TeSelle Professor of Law, University of Florida College of Law. I would like to thank Alice G. Abreu, Christopher H. Hanna, Paul R. McDaniel, David M. Richard- son, and James R. Repetti for their helpful comments on earlier drafts of this Article. All opinions expressed herein and any remaining errors are my own. 993 Boston College Law Review [Vol. 45:993 in the epigram.1 "Put in less stately language, the Matthew Effect con- sists in the accruing of greater increments of recognition for particu- lar scientific contributions to scientists of considerable repute and the withholding of such recognition from scientists who have not yet made their mark."2 The Matthew Effect is not limited to the context in which Robert Merton first coined it. More generally, it is a synonym for the well-known colloquial aphorism, "The rich get richer and the poor get poorer." This Article is about the Matthew Effect in the dis- tribution of incomes in the United States and the failure of the fed- eral tax system to address the Matthew Effect. Over twenty years ago, economist Paul Samuelson observed, "If we made an income pyramid out of a child's blocks, with each layer $1000 of income, the peak would be far higher than the portraying 3 Eiffel Tower, but most of us would be within a yard of the ground." Things have changed a lot since then, and things have changed little since then. The peak is higher, but most people are still in essentially the same place. During the last two decades of the twentieth century, the distribution of incomes and wealth in the United States reached levels of inequality that have not been seen since the Roaring Twen- ties. Although the "Roaring Nineties," as the decade was labeled by Joseph E. Stiglitz, might have been "the world's most prosperous dec- ade,"4 the prosperity was not spread around. The data indicate that a very small number of people garnered an overwhelming amount of the increase in incomes and wealth in that decade, as well as in the prior decade. Between 1947 and 1997, median family income (in constant dol- lars) grew by 122%. 5 Ninety-one percent of this growth, however, oc- curred before 1970. Between 1979 and 1997, average household be- fore-tax income grew by nearly one-third in real terms, but that growth was shared unevenly across the income distribution. Average income for households in the top quintile rose by more than one-half, while average income for the middle quintile increased by only 10% I See Matthew 25:29; Robert K. Merton, The Matthew Effect in Science, 159 SCIENCE 56, 58 (1968). 2 Merton, supra note 1, at 58. 3 PAUL SAMUELSON, ECONOMICS 80 (11th ed. 1980). 4 JOsEPH E. STIGLITZ, THE ROARING NINETIES (2003) (referencing cover). 5 Daniel H. Weinberg et al., Fifty Years of U.S. Income Data from the Current Population Survey: Alternatives, Trends, and Quality, 89 AM. ECON. REV. 18, 20 (1999) (indicating growth in the median family income from $20,102 to $44,368 (in 1997 dollars)). 20041 The Matthew Effect &Federal Taxation and average income for the lowest quintile decreased slightly.6 In- come growth at the very top of the distribution was even greater. Av- erage before-tax income in 1997 dollars for the top 1% of households more than doubled, rising from $420,000 in 1979 to more than $1 7 million in 1997. Inequality continued to increase in the late-1990s. During the 1950s and 1960s, family income inequality decreased, but the tide changed after 1969, and through the last three decades of the twentieth century income inequality increased. 8 Nevertheless, the federal tax system did little to ameliorate the increasing economic ine- quality. Prior to 1982, high marginal rates at the top had some redis- tributive effects. Redistributive effects were reduced as a result of the rate reductions in the Economic Recovery Act of 1981 (the "1981 Act"), and after the Tax Reform Act of 1986 (the "1986 Act"), the redistribu- tive effect of the income tax was relatively low.9 Adoption of the 39.6% bracket in 1993 increased the redistributive effects of the income tax, but redistribution decreased again as a result of the reduction in capital gains rates in 1997. As of 2000, the redistributive effect of the income tax was somewhat less than it was in the early 1980s, although it was somewhat greater than it was in the early 1990s.10 As we move into the new millennium, however, recent changes in the federal tax system pre- sage a decreasing role not only in redistribution, but in mitigation of vast disparities in income and wealth. Since the inauguration of the Bush Administration1" in 2000, there have been three major tax acts, which have reduced significantly the tax burden of the super-rich, while handing out small change to everyone else. Part I of this Article examines in detail the increasing concentra- tion of income and wealth in the top 1%, and particularly within much narrower cohorts near the top of the top 1%, that has occurred 6 CONG. BUDGET OFFICE, EFFECTIVE FEDERAL TAX RATES, 1979-1997, at 6, 7 & fig.l-5 (2001), available at http://www.cbo.gov/ftpdocs/30xx/doc3089/EffectiveTaxRate.pdf (last modified Nov. 13, 2001). 7 See id. at 10, 11, 170-71 app.J. Although the Congressional Budget Office did not in- clude comprehensive data for years after 1997, the study states that the rapid rise in the share of income going to the top of the distribution continued at least into 1998 and 1999. See id. 8 SeeWeinberg et al., supra note 5, at 21. 9Thomas B. Petska et al., New Estimates of the Distributionof Individual Income and Taxes, in 2002 PROCEEDINGS OF THE 95TH ANNUAL NATIONAL TAX ASSOCIATION CONFERENCE ON TAXATION 342, 350 (2003). 10Id. at 349. 11 All references to the "Administration" or the "Bush Administration" are to the George W. Bush Administration unless otherwise indicated. Boston College Law Review [Vol. 45:993 over the past twenty-five years. 12 This Part demonstrates the strong Matthew Effect in incomes in the United States over that period. The super-rich are pulling away from everyone by so much and at a rate so fast that the fact that incomes of many households at the bottom and in the middle have stagnated, or even fallen in constant dollars, has been obscured by ever increasing per capita income-a false talisman of progress because it obscures distributional issues. Part II discusses the distribution of after-tax income and wealth in the United States in recent years. 13 Wealth and income levels are highly correlated. This Part describes the increasing disparity in after- tax incomes, particularly the rate at which the amount and share of total after-tax income of the top 0.5%, and even of smaller cohorts further toward the top of the income pyramid, are growing relative to everyone else. Moreover, the share of wealth owned by the super-rich is growing even faster than its share of income.
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