There’s an interesting post by Dylan Matthews at the WP’s Wonkblog that I want to commend to your attention. The post is, essentially, a commentary on this paper by Andrew Fieldhouse, a kid who works for the Economic Policy Institute as a “policy analyst”, which finds that the reduction in nominal tax rates for the top income earners of the 1980s hasn’t had much to do with the deteriorating condition of income inequality since then. That doesn’t particularly surprise me but I assume it will come as a bolt from the blue to the youngsters at Wonkblog, basically another word for the Center for American Progress.
Here’s the nugget. Imagine that the tax reforms of the 1980s hadn’t taken place. All other things being equal would that have prevented the increase in income inequality?
So, would we have avoided the increase in inequality over the period in question? Not even remotely. The 1979 scenario lines shows inequality rising a bit more slowly than what actually happened, but the underlying pattern is the same.
“Roughly 30 percent of the rise in post-tax, post-transfer inequality between 1979 and 2007 can be attributed to changes in the redistributive nature of tax and budget policy,” Fieldhouse concludes. “It is still the case, however, that shifts in the market distribution of income are the primary factors driving the rise in inequality.”
Again, not surprising. Sweden has experienced rising income inequality over the last couple of decades, too.
I think the essential problem is that you might increase the nominal tax rate on the highest income earners but it’s darned hard to raise the effective tax rate. That’s especially true when your tax system isn’t just a way of producing revenue for running the government but is also intended to reward good behavior (whatever that is) and punish bad behavior (ditto). People can change their behavior to reduce their tax liability and the higher your income the more freedom you have to do that.
However, let’s assume that tax policy can’t do much about income inequality and, further, let’s assume that you want there to be less of it. What do you do? Mr. Matthews presents his preferred list which, unfortunately, to my eye varies from the unlikely to the downright mistaken.
#1 on his list is increasing the density of trade unionism in the United States. Now, I don’t know what the economic effects of increasing trade unionism in 1930, 1940, or 1950 were but I have a pretty good idea of what they are today.
Think about a rectangle. You calculate the area of the rectangle by multiplying the height times the width. If the height of the rectangle increases, the area of the rectangle does not increase if the width decreases correspondingly. That’s how trade unions have worked for the last several decades. They’ve raised the height (wages) by decreasing the width (the number of people receiving the wage). As I write this we have 20 million people who are unemployed or underemployed. We don’t need to raise the wages of those who remain employed by throwing more people out of work.
Let me present a few proposals from my list.
First, stop redistributing from the top 1% of income earners to the next 9% of income earners. That would require a major overhaul in our healthcare system, either towards a full-fledged national health system or in favor of catastrophic care insurance only (AKA “high deductible plans”). Other things would be required as well, e.g. abolishing the payroll tax or lowering it and increasing FICA max, disincentivizing investment in purely financial assets (as opposed to expanding facilities, buying equipment, doing R&D, etc.), and so on. Sadly, practically all of our healthcare, education, immigration, and trade policy is predicated on the notion that if you redistribute within the top 10% of income earners it will trickle down to the remaining 90%. I see very little evidence of this happening.
Second, stop importing so much. Our high level of imports renders fiscal stimulus much less effective than it otherwise might be. Put more money in somebody’s pocket and it doesn’t increase economic activity so that their neighbors can find a job. Instead it increases economic activity in Germany, China, Japan, and South Korea.
Third, reduce military spending.
Fourth, make producing as much energy as inexpensively and cleanly as we can and distributing it more efficiently and securely a national priority. Not just “alternative energy”. Coal, natural gas, and nuclear, too. Use the proceeds from reducing military spending to improve the grid.