Writing at the Wall Street Journal, economist John B. Taylor rejects the argument that increasing income inequality in the United States is a consequence of tax policy:
Weak economic growth today, according to the middle-out view, is the consequence of a wider distribution, or dispersion, of income (more at the upper end). This growth in inequality, the argument goes, is the consequence of tax cuts since the 1980s, a trend toward deregulation (that actually began under the Carter administration), and fewer targeted federal programs.
The key causal factor of the middle-out view is that a wider income distribution slows economic growth by lowering consumption demand. Saving rates rise and consumption falls if the share of income shifts toward the top, according to middle-out reasoning, because people with higher incomes tend to save more than those with lower incomes.
The data for the recovery since mid-2009 do not support this view. The 5.4% overall savings rate during this recovery is not high compared with the 8.4% average since 1960. It is relatively low compared to past recoveries, such as the 9.3% savings rate during a comparable period during the recovery in the early 1980s.
Moreover, data do not support the view that tax cuts in the past 30 years are responsible for the widening income distribution. According to the Congressional Budget Office, the distribution of market income before taxes widened in the 1980s and ’90s by about as much as the distribution of income after taxes.
with which I agree and asserts that what’s promoting income inequality is education:
What caused the differential income growth in the 1980s and 1990s? Research shows that the returns to education started increasing in the 1980s. For example, the wage premium for going to college compared to high school increased. But the supply of educated students did not respond to the increase in returns. High-school graduation rates were declining in the 1980s and ’90s and have moved very little since then. Test scores of American students fell in international rankings. With little supply response, the returns to those with the education rose more quickly, causing the income distribution to widen.
with which I don’t.
Contrary to Dr. Taylor, the history of the last thirty years tells us that what we protect and subsidize prospers disproportionately and what we don’t doesn’t. If we had protected and subsidized auto industry jobs the way we protect and subsidize healthcare providers, we’d have at least as many of them as we did thirty years ago (rather than the fraction we do now) and we’d have the most expensive automobiles in the world.
In the starkest terms, we can either pick winners and losers or not. If we elect to pick winners and losers, it’s insane to be surprised when the winners win and the losers lose.
I thought this post would get more comments.
I don’t think gross income inequality is necessarily a good thing, although I’m a) not convinced its as horrible as its made out to be, b) am flummoxed as to how QE can be viewed as good but savings by wealthy people not good, each lowering the cost of capital, c) think most of the so called fixes are self defeating. If I were a cynic I’d think its been made an issue simply to support higher taxes. If, ahem, I was a cynic.
Separately, I think one thing that all on this blogsite agree with is the error of subsidy policy. As I’ve noted, it is central to my “small government” worldview. However, I don’t think it follows that if we subsidize certain favored or politically skillful industries that education isn’t also a factor in income inequality. I see, Dave, you used the word “disproportionately.” Perhaps that is the nuance.
Yeah, me too.
As a follow on…….
Like global warming, I don’t have the slightest idea what to do about income inequality. I should put some meat on those bones.
Punishing the successful through taxation is insane. Remember the yacht tax? And we are about as progressive in tax incidence as we have been post WWII…….and how’s it going?
People without a pot to piss in buy cell phones, own multiple TV’s and cable, and pay to watch multimillionaires fumble footballs, rap crap, miss the cutoff man, act in awful movies or TV shows, and pay through the nose for the most outrageous nutrition to price ratio foods. Can you say misallocation of precious resources……..like that low income?
People drop out of school, or buy worthless degrees at about $50K per year, and spend time on social media vs working to get ahead. Watch “man in the street” interviews and ask yourself: “if I was an employer, would I hire or pay jack squat to this person?? How’s that going?
I could go on. America needs a reality check, not the crack given us by an excuse-making political class.
Drew
People’s minds are on Syria, foreign policy explanations, and the president’s game of ping pong decision-making. In a very short time, though, we’re be wrapped up in domestic issues, by virture of debt ceiling deadlines and budgetary funding matters. There is always a drama waiting it’s turn on the horizon.
Tom Edsall, Can the Government Actually Do Anything About Inequality?