Race and bad tax policies

There’s a jarring dissonance between the Republican tax proposals that are working their way through Congress and Republican election campaigns. For the very wealthy, the bill recently passed in the U. S. Senate bill offers large and permanent tax cuts, while middle- income earners see small, temporary cuts that transform into tax increases in the medium term. And right on cue, senior Republican leaders such as House of Representatives Speaker Paul Ryan are already talking about the need to reduce expenditures on Social Security and Medicare in order to address the gaping hole in the U.S. federal budget caused by these tax cuts.

The Republican tax agenda is virtually a caricature of what you’d expect from a plutocracy, and yet the Republicans’ populist, anti-elite rhetoric still resonates. Why? The lack of political support for progressive redistributions of income is one of the enduring mysteries of American politics.

A popular explanation — that the United States offers equality of opportunity, so there’s less need to worry about inequality of outcomes — doesn’t fit the data. In point of fact, the rate of social mobility in the U. S. is among the lowest among developed countries. Starting points matter in the U. S. more than one would expect from a country that gave rise to the American Dream. A child born to a low- income family in the U.S. has a much smaller chance of moving up the social ladder than does a child born to a low- income family in most other OECD countries, Canada included.

Another class of explanations, as exemplified by Thomas Franks’ “What’s the Matter with Kansas?” is based on the proposition that socially conservative Americans aren’t very smart. Time and again, Republicans campaign on themes designed to appeal to social conservatives, only to focus on regressive tax policies once in power. Low- and middleincome social conservatives end up being worse off economically, but continue to vote Republican anyway.

This is a seductive thesis, and may even be correct. But as an economist, I’m reluctant to put much weight on the idea that people make the same, predictable mistake over and over again. Among other things, this line of reasoning quickly leads to the unpalatable conclusion that some people shouldn’t be allowed to vote in the first place.

Alberto Alesina, Edward Glaeser and Bruce Sacerdote asked, “Why doesn’t the U. S. have a European- style welfare system?” in a 2001 National Bureau of Economic Research working paper. There are many possible answers. For example, if market incomes in Europe were much more unequally distributed than in the U.S., then there would be a greater need for redistributive policies in Europe. This isn’t the case, of course, and it turns out that many of the obvious answers — including, as we have seen, differences in social mobility — aren’t consistent with the data. The one factor that does seem to matter is race.

All discussions about inequality always begin with an assumption about who belongs in the reference population and who does not. For example, Canadian progressives who fret about the effects of liberalized trade on Canadian inequality are explicitly excluding non- Canadians from their analyses. They may acknowledge that low- income workers in lowincome countries have benefited from access to Canadian markets. But since these workers are not Canadian, their interests don’t enter the discussion.

In the United States, racial animosity is still strong enough f or many white Americans to exclude black Americans from their reference populations. Since blacks are greatly over-represented among those with low incomes, progressive policies that shift income from highincome Americans to lowincome Americans are interpreted as shifting income from whites to blacks. As the authors put it, a “natural generalization of the race-based theory is that Americans think of the poor as members of some different group while Europeans think of the poor as members of their own group.”

They also cite survey data consistent with this hypothesis. For example, “support for welfare is higher among people who l i ve near to many welfare recipients who are of the same race,” while “support for welfare is lower among people who live near welfare recipients who are of a different race.” In a related vein, Americans are more likely to think that people l i ving in poverty are “lazy,” and less likely to think that they were simply unlucky.

The forces at work here are not uniquely American or always race-based: ask the United Conservative Party of Alberta for its views about equalization. But for many white Americans — at least, for many white Republican voters — who see the redistribution of income from rich to poor as being a transfer from whites to blacks, there is no conflict between populist rhetoric and a regressive tax agenda. Shifting income from poor to rich is the same thing as shifting income from “the others” to their preferred reference group.

FORCES AT WORK HERE ARE NOT UNIQUELY AMERICAN. — STEPHEN GORDON