Redistribution

So here are the household income quintiles for 2009 (the latest year US Census reports)  plus, the top 5%.  There were 117,538,000 households in the US.

mean      upper limit  percentage
11,552   20,453         3.4
29,257   38,550         8.6
49,534   61,801       14.6
78,694   100,000     23.2
170,844 180,001     50.3 
295,388                   21.7 (these guys are counted twice)

What would happen if we redistributed income from the top earners and gave it to the bottom 60%?  Let's take 10% from the top 20% and split it evenly: (17K/3=5694.8)
11,552+5694.8=      17,246.8
29,257+5694.8=      34,951.8
49,534+5694.8=      55,228.8
78,694+0=               78,964
170,884-17,088.4= 153,624.6

That's actually a pretty good deal for everybody...the folks on the bottom get a huge boost to their income--enough to cover a big expense, like medical insurance, and the folks on the top don't really lose that much.  The rich don't become poor, they become only slightly less rich.  The poor get a lot richer though.

How about if we took 20% from the top 5%, and split it evenly to the bottom 60%: (59K/4/3=4923.1)
11,552+4923.1=16,475.1
29,257+4923.1=34,180.1
49,534+4923.1=54,457.1
78,684+0=        78,684
170,884+0=     170,884
295,388-59077.6= 236,310.4
That's almost as good.  The top guys don't feel it much more than they felt 10%.  Note that 20% of average income in the top 5% is pretty close to the total income of the the 60th percentile.

The graduated income tax structure is intended to do something like this in the name of taxing equally.  The ideal would be to subtract "living expenses" from everybody's income and tax all the rest at the same percentage for everybody.   For the bottom 60%, "living expenses" are nearly all their income.  For the rich, they're a much smaller fraction, even though  actual dollars spent is much higher. Consequently, a simple deduction like this doesn't get it right.   I think living expenses top out at something like $70K:  food, transportation, housing, medical.   Living richer than that is luxury.  So another way to do it would be to subtract $70K from every household's income and then have one rate for everything above that.