Seeking new tools to address income gap
What can be done about income inequality? For all the attention devoted to the widening chasm between the very rich and the rest of American society, perhaps the most urgent question is whether the trend can realistically be turned around within, say, the next two or three decades. The answer may well be no. “I am very pessimistic about the capacity of the American political system to redistribute income within a reasonable period of time,” said Robert Solow, the Nobel laureate economist from the Massachusetts Institute of Technology, in concluding comments at a seminar on inequality that drew some of the top scholars on the subject to New York last month.
“I simply don’t think that
legislation either to support the safety net or to tax high incomes stands a chance in the Congress,” Solow told me in a follow-up interview last week, particularly given the likelihood that the midterm election will lead to a more conservative Senate next year.
If further redistribution turns out to be politically impossible, the question is whether any better tools are available.
Washington already redistributes income from the rich to the poor. Richard Burkhauser and Philip Armour from Cornell and Jeff Larrimore from the Joint Committee on Taxation have become heroes to the right by trying to establish that government redistribution has, in fact, erased the trend of increasing inequality.
While these claims rest on fanciful assumptions about what counts as in- come, their analysis of taxes and government programs does support the argument that the government does more than it has in a long time to protect lowerincome Americans from the blows of the market economy.
President Barack Obama has certainly tried to redistribute more. In a deal with Republicans in Congress two years ago, he was able to increase the top tax rate on long-term capital gains and push the top rate of income tax back to 39.6 percent, where it was when President Bill Clinton left office in 2001.
Obamacare has also added 0.9 percentage points to the payroll tax for richer families and imposed a 3.8 percentage-point tax on their investment income.
The nonpartisan Tax Policy Center projects that the richest 1 percent of households will pay 33.4 percent of their income in federal taxes this year, on average. That’s almost 6 percentage points more than in 2008.
Social scientists still debate furiously how much government-provided health insurance is truly worth for poor Americans. But the health care these taxes will pay for is certainly better than nothing.
After all this redistribution, however, the question remains: Is any of this enough to have a noticeable effect on the income gap? The answer still seems to be no.
According to the Tax Policy Center, federal taxes in 2014 will trim the 1-percenters’ share of national income to 14.1 percent, from 17.1 percent. That’s only a slightly more than in 2008, when taxes reduced their slice of the national pie to 13.6 percent, from 15.5 percent.
And the underlying tide is so powerful that redistri- bution efforts can only slow the trend.
By 2024, at the end of the Policy Center’s forecast window, it expects the richest 1 percent of Americans to take 19.7 percent of income before federal taxes. Under current law, taxes would trim that to 16.6 percent.
Many economists argue that there are better tools than government redistribution to mitigate rising inequality. Education is a favorite.
Raising the minimum wage is also a popular choice. Reducing tax benefits for corporations and well-to-do Americans (tax breaks for oil companies or the mortgage interest deduction, for example) might also help.
But enough to do the trick?
A simulation by economists at the Organization for Economic Cooperation and Development, a policy shop for advanced industrialized countries, concluded that raising the ratio between the minimum wage and the typical wage in the United States to the average across all the countries in the group would have only a minimal effect on the income gap.
Providing more education for all might have more punch. The problem is, in the United States the education system appears to be contributing to income inequality, rather than reducing it.
Thomas Piketty, who prompted the current inequality fever when he published the English translation of his blockbuster Capital in the Twenty-First Century in March, still holds hope that redistribution could save the day.
“Things can change faster than expected,” he told me. “The United States invented sharply progressive taxation of income and inherited wealth in the interwar period, and nobody would have guessed this around 1910.”
But maybe we should think about inequality in a different way.
If redistribution via taxes and transfers cannot make more of a dent in the prevailing pattern of income inequality, perhaps a focus on what determines market incomes, before taxes and transfers kick in, would prove more promising.
“We need to think of ways to change the market determination of income,” Solow told me.
“How does capitalism generate inequality?”
To the extent that widening inequality is caused by the yawning gap between the epicurean pay deals in the executive suite and the stagnant wages paid to those on the shop floor, it might best be addressed at the level of the corporation, not by government.