So Near and Yet So Far

In his recent Reuters op-ed Lawrence Summers takes note of the problem of income inequality:

Sharp increases in the share of income going to the top 1 percent of earners, a rising share of income going to profits, stagnant real wages, and a rising gap between productivity growth and growth in median family income are all valid causes for concern. A generation ago, it could have been plausibly asserted that the economy’s overall growth rate was the dominant determinant of growth in middle-class incomes and progress in reducing poverty. This is no longer plausible. The United States may well be on the way to becoming a Downton Abbey economy.

I would characterize that as “the plan embodied in the Washington consensus is working” but no matter. He goes on to establish the parameters of a solution:

So it is not enough to identify policies that reduce inequality. To be effective they must also raise the incomes of the middle class and the poor. Tax reform has a major role to play here. Apart from its adverse effects on economic efficiency, our current tax code allows a far larger share of the income of the rich than the poor or middle class to escape taxation.

Sadly, these are as close to a solution as he proposes:

For example, last year’s increase in the stock market represented an increase in wealth of about $6 trillion — with the lion’s share going to the very wealthy. The government is unlikely to collect as much as 10 percent of this figure given capital gains exemption, the ability to defer unrealized capital gains, and the absence of any tax on gains on assets passed on at death.

Another example is provided by our corporate tax system. Because of various loopholes the ratio of corporate tax collections to the market value of U.S. corporations is at a near record low.

Then there is the reality that the estate tax can be substantially avoided by those prepared to plan and seek sophisticated advice. Closing loopholes that only the wealthy can enjoy would enable targeted tax measures like the Earned Income Tax Credit, which raise the incomes of the poor and middle class more than dollar for dollar by incentivizing working and saving.

I wish he would quantify the income and economic growth effects of those reforms. My intuition is that no practically conceivable change to any of those will do much about income inequality at all.

I notice, too, that he doesn’t mention the 500 lb. gorillas of tax expenditures: the home mortgage deduction and the deductibility of healthcare insurance, the overwhelming preponderance of which goes to households in the highest income brackets. Or agricultural subsidies, something a bipartisan consensus in Congress supports, which mostly go to large corporate concerns.

Lord, send us a cure! The disease is already here. It’s a lot easier to identify the problem than it is to propose a solution.