What can be done? The President will outline some useful proposals, many of which he’s called for before: a higher minimum wage, an extension of unemployment benefits, universal pre-K programs, changes in the labor laws, more spending on infrastructure and job training, the elimination of corporate tax loopholes, and—this is a new one—an agreement with big corporations not to discriminate against the the long-term unemployed when hiring. Sadly, Republicans in Congress are likely to resist almost all of this agenda—just as they have done for the past three years.
But even if the Republicans were to have a Damascene conversion, and pass the President’s proposals, the harsh fact is it probably wouldn’t make very much of a difference to overall levels of inequality. The problem is too large and deep-rooted to be amenable to modest reformism. And that means we might want to consider some policy options that are currently consideredverboten.
Here are ten ideas, none of which are original. If you examine the work of economists and writers interested in the subject, you will find all sorts of suggestions for tackling inequality, several of which go back many decades. To be sure, there may be reasons not to pursue some of these ideas. Americans may place certain values—such as rewarding ingenuity and commercial success, and protecting personal property—ahead of equity. But if we are serious about putting a dent in inequality, especially the increasing concentration of income and wealth at the very top, we will eventually have to consider some of these proposals.
1. Establish a guaranteed minimum income for all American households. This is an old idea: back in the nineteen-sixties, it had the support of everybody from John Kenneth Galbraith to Milton Friedman. Raising the minimum wage would go some way towards achieving it, but only some way: many low-wage workers, particularly young ones, come from reasonably well off households. In addition, we could expand the earned-income tax credit, which acts like a negative income tax. Workers in jobs that don’t pay well enough to bring them up to the guaranteed minimum would effectively receive a wage subsidy from the government. It’s not such a radical idea, or it shouldn’t be. Back in 1970, the House of Representatives backed a very similar plan, but the Senate rejected it.
2. Abolish the payroll tax. If we want to boost wages, we need to increase the demand for labor. An obvious way to do this is to get rid of taxes that raise the cost of employing people. Under the current tax system, firms faced with a choice between hiring more workers or investing in new machinery have an incentive to go the latter route. Abolishing the payroll tax, in addition to making labor more attractive to firms, would render the overall tax system more progressive. Because of the upper limit on contributions, modestly remunerated workers currently pay more in payroll taxes, as a percentage of their income, than the highly paid.
3. Replace the payroll tax with a consumption tax. Payroll taxes pay for Social Security and Medicare. If we abolish them, alternative sources of revenue will be needed, and a national consumption tax, which most other advanced countries already have in place, may be a viable alternative. While consumption taxes can be regressive, they don’t have to be. The new tax could exempt staples, such as food, and levy a higher rate on luxury goods. And, as Robert Frank, of Cornell, has suggested, the I.R.S. could tax consumption above a certain annual amount indirectly. To do this, it would simply levy a tax on the difference between reported income and saving, which is consumption.
4. Raise the top rate of income tax. If you look at history, it appears that there’s plenty of scope to do this without causing the likes of Steve Schwarzman and Tom Perkins to decamp for Switzerland in order to escape the tax Nazis. In the nineteen-fifties, the top rate was more than eighty-five per cent, but it didn’t kick in until you earned four hundred thousand dollars a year, or about $3.9 million in today’s money. Now, the top rate is 39.6 per cent (or a few percent points higher if you include the taxes on high earners in the Affordable Care Act) and it kicks in at $406,750 ($457,600 for married couples).
Based on 2006 tax returns, the average income for those in the top one per cent by income was $717,000; the average income of the top 0.1 per cent was $3.9 million and the average income of the top 0.01 percent was $31 million. These figures are probably quite a bit higher now. One possibility is to combine a new top rate with a higher income threshold, or several of them. How high could the new top rate go? In a 2011 paper that sparked an interesting debate, Peter Diamond, of M.I.T., and Emmanuel Saez, of Berkeley, argued that, based on the costs and benefits to society as a whole, it should be set at seventy-three per cent—a bit below the level in the nineteen-fifties, but well above today’s rate.
5. Tax wealth properly. Most very rich people earn the bulk of their income from capital, and the distribution of wealth is even more lopsided than the distribution of income. The top one per cent accounts for about seventeen per cent of overall income. Its share of total wealth is even higher: about thirty-six per cent of overall wealth and forty-two per cent of financial assets. Over the past few decades, changes to the tax system have accentuated this inequity rather than tackling it. Taxes on wealth, particularly the capital-gains tax and the levy on estates, have been reduced. Last year, for example, as part of the agreement to avoid the fiscal cliff, Congress trimmed the estate tax in a way that saved the wealthiest estates about a million dollars each.
One obvious move is to reverse this trend. For high earners, the tax rate on capital gains is twenty per cent. In the nineteen-seventies, it was almost forty per cent. Another idea, and one with some sound economics behind it, is to introduce a wealth tax targeting the assets that rich families own but don’t cash in. Residential property, the most widely-owned asset, is already taxed. Why should financial assets, which are mostly owned by the rich, be treated any differently? They shouldn’t. In 2012, Ronald McKinnon, a Stanford economist, published an article in the Wall Street Journal entitled “The Conservative Case for a Wealth Tax.” He proposed a three per cent wealth tax on households with assets of more than six million dollars. It sounded reasonable then; it sounds reasonable now.
6. Give ordinary Americans “homestead” grants. Most people in the bottom half of the income distribution have few or no financial assets, and this includes 401(k) plans. The median African-American and Latino families own no stocks at all. To encourage saving and thrift among the less well off, and to give them a stake in society, various forms of asset-based redistribution have been proposed. For example, in their 1999 book, “The Stakeholder Society”, Bruce Ackerman and Anne Alstott, of Yale Law School, suggested giving each high school senior eighty thousand dollars to spend on college, buy an apartment, or start a family. Since it would be expensive, this idea might sound like a non-starter. But something similar has been tried before, and successfully, in the United States: the Homestead Acts of the nineteenth century, which gave settlers plots of land at little or no cost.
7. Nationalize the public-education system. The United States is one of the few advanced countries where public schools are locally financed, which means that schools located in poor areas receive far less funding than those in rich areas. Most of our competitors have a national system, in which expenditures are equalized across the country. And that’s not the only advantage of national systems. Countries like Japan and South Korea have shown how they can be used to impose common standards on students and teachers, raising overall standards. The Obama Administration’s Race to the Top program has moved the United States a small way in this direction, but there’s still a long distance to go.
8. Copy the Germans and greatly expand technical education. In the United States, education in middle schools and high schools is geared towards preparing students for college. Experience shows that this approach doesn’t work for many students, particularly the less academically gifted. Germany takes a different approach, which has helped it to preserve a vibrant manufacturing base and a strong middle class. Some German teen-agers go to American-style high schools. But most of them attend vocational schools, where there is more emphasis on preparing for the job market. After leaving school, many Germans start an apprenticeship, during which they learn a trade and continue their education, while receiving a modest salary. Setting up such a system from scratch in the United States wouldn’t be easy. But if we are serious about providing workers with the skills they need to make decent wages, it’s worth considering.
9. Abolish private schools and legacy admissions to private universities. The primary role of élite schools and colleges is to reproduce the élite. One way to make the upper crust more representative of society as a whole is to remove its educational advantages. This is not only, or mainly, a matter of punishing the rich. Perhaps the best way to raise the standards of public schools is to make everybody use them, including the children of the monied and professional classes. In affluent towns and suburbs, where something like this already happens, you don’t hear many complaints about how bad the schools are. With the well-to-do having a personal stake in the school system, there is political support for adequate funding, as well as an abundant supply of interested parents to help out the schools and monitor what they are doing.
At the college level, many private institutions have already made big strides in reforming their admissions procedures. The rest could be encouraged to do the same, perhaps by threatening to remove their tax-exempt status. Being able to guarantee your offspring a place at your alma mater is the mark of an aristocracy, not a democracy.
10. Introduce a financial-transactions tax. The rise in inequality has coincided with an enormous growth in the financial sector, which remunerates its employees extremely generously. Indeed, much of the shift in overall income to the top one per cent can be explained by the contribution of this one industry. “Executives, and workers in finance, accounted for 58 percent of the expansion of income for the top 1 percent and 67 percent of the increase in income for the top 0.1 percent from 1979 to 2005,” a 2012 paper from the liberal Economic Policy Institute pointed out.
What to do about excessive pay in the financial sector is a tricky issue. Reforming compensation practices is a part of the solution, as is raising the top tax rate for all high earners. Another option is to take the late James Tobin’s suggestion and put some sand in the works of Wall Street by imposing a small tax on each financial transaction. Depending on how high it is set, and how traders react to it, such a tax could raise somewhere between $175 and $350 billion a year, according to a 2009 study by the Center for Economic and Policy Research. That’s real money. It’s many times the cost of providing universal pre-K, for example, or introducing a comprehensive retraining scheme for the long-term unemployed.
Source: newyorker.com/
Author: JOHN CASSIDY
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