Inequality–does it matter? should taxes address it?

Bruce Bartlett’s December 15, 2009 piece, Inequality: A Problem?, states Bartlett’s agreement with Dalton Conley that

“the left should stop worrying so much about inequality per se–its costs are overstated, as well as the benefits of greater equality. Instead …
liberals should concentrate more on helping the poor and less on beating up
the rich.”

Now, before we even get into the inequality stuff, you’ll notice that the statement above is loaded with presuppositions. It pre-supposes that liberals are extraordinarily focused on “beating up the rich” and that they are not currently very interested in “helping the poor.” Further, it presupposes that whatever “beating up on the rich” involves, it cannot “help the poor.”

Are liberals focused on “beating up on the rich”? I expect Bartlett would point to bloggers (such as myself) as examples. I have rather persistently argued for higher taxation of the rich and super-rich through more progressive rates and elimination of the capital gains preference which results in low effective tax rates on those whose income is predominantly income from financial assets. The income tax changes over the last four decades have eroded progressivity–instead of the 70% or 90% rate that we had at times in the past on very high incomes, the super-rich with multimillions of adjusted gross income pay the same marginal rate as the merely rich who have more than about $350,000 annually. The rich and super-rich derive the most benefit from the biggest loopholes in the tax code, like the mortgage interest deduction, the charitable contribution deduction, and the property tax deduction. They are the ones who buy muni bonds and get to exclude the interest from income, so that the rate of return on munis is set with the rich as the targeted customer (high enough sp that the exclusion makes the return on munis (with no tax) better than the return on corporate bonds (after tax)). Is that line of argumentation “beating up on the rich”? No, quite assuredly it is not. The wealthy don’t merit punishment for being wealthy. But taxation is not punishment. Taxation is merely the exaction of appropriate tribute based on societal members’ ability to pay, to ensure that the state can continue to function appropriately in service to all its citizens. Making the case that the status quo is overly solicitous of the rich and super-rich is not “beating up” on the rich.

Are progressives not “helping the poor” and in fact beating up on the rich rather than focusing on the poor? No and No. There are lots of ways to help the poor, including volunteering, giving to charities, and others. Many progressives are engaged in all of those ways of helping the poor. We mentor in schools, give to food kitchens as well as to environmental organizations, donate canned foods at Christmas, and work in our communities for better schools, better transportion, better jobs, better shelters, less discrimination. But none of those are enough in a society that has become stressfully bipolar between the well-to-do and the rest (not to mention, the making it okay and the truly down-and-out). Progressives, that is, cannot easily help the poor and ignore the way that wealth has eroded the democratic society in which we all exist, because that erosion is eating away at the possibilities for the poor to pull themselves out of poverty.

Bartlett goes on to say:

I think he is right. I have never understood how I am worse off if
the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is
unchanged. It may be aesthetically displeasing, but it doesn’t impose any
actual costs on anyone as long as the pie is not fixed.”

(Beale here again) The growing income disparity is not merely aesthetically displeasing (which it is) or environmentally harmful (which it is, as the wealthy consume many times their share of the world’s resources in rambling from one multi-million mcmansion to another) or humiliating for many (which it is, especially for those growing numbers in the “servant” class who work at the whim of the wealthy and live in unsatisfactory conditions while watching the wealthy waste in a night what could feed their children for a year). It does impose costs, even if the pie is not fixed. Those costs include the long-term impact to broad-based growth when wealth becomes more and more concentrated in the hands of a very few. And one is worse off when the top 1% of the households increase their share of national wealth to the detriment of everyone else. A society with such wealth imbalances is a society that also has enormous power imbalances. Wealth creates power, and that power is almost invariably used to further the aims of those holding it. Democratic institutions are particularly vulnerable, since wealth and power permit the capture of agencies and legislatures, so that the institution is thwarted from serving the broader constitutency in order to do the bidding of the wealthy oligarchs who hold the reins to power. It is this sense in which the populist anger expressed by the teapartiers is most distressing–it is misdirected, seeing evil per se in government and good per se in “private enterprise” and unable to understand the important role of government in standing as protector between the private corporatocracy and citizens.

Bartlett continues:

[N]either does it follow that there is no limit to how much we can soak the
rich without average people suffering some of the consequences. We really
don’t want the rich spending all their time figuring out how to hide their
wealth from the tax man or engaging in conspicuous consumption; we’d rather that they invested their wealth in businesses that will increase their wealth but also create jobs and income for the rest of us, too.

Hmmm. First, we are nowhere near “soaking the rich” in this country. IN fact, we have been making sure, with almost every change to tax policy undertaken in the last four decades, that the rich sat high and dry and comfortable. Moving them down a notch or two to the benches on the same level with the rest of us won’t begin to soak them–it will, in fact, hardly be felt. Second, while we definitely don’t want the rich spending all their time hiding their wealth, telling them that they can just keep it all without paying a fair share of taxes is not the alternative. Decent enforcement rules will go a long way to solving the problem of hiding wealth–broker reporting, which most think is going to happen this year, will help, but restoring funding to the government’s collection efforts and requiring more audits of the wealthy than of the Earned Income Tax Credit would be the best ideas. (I’m not even so sure that I don’t want the wealthy engaging in conspicuous consumption. AT least that way there would be less to pass down to heirs and less possibility of sustainable oligarchy.) Taxing the wealthy moves the dollars to the government, which moves the dollars out into businesses that provide services the government buys, and then those businesses invest the dollars. I like that better than depending on the wealthy to invest and create jobs for the rest of us. I fear they are just as likely to invest as they so often have in the past–in emerging economies where they suck out the natural resources and leave those populations without jobs or much to show for their foreign input, without doing a thing to create jobs here either.

Farther on, Bartlett suggests taxes cannot assist a move to less inequality because their only effect is “by discouraging the rich from earning income.” There the Chicago School thinking comes out–the idea that taxes distort decisions, and if you tax the income of the rich, they just will do without the income. No one has yet satisfactorily explained why the rich don’t still like 50% or 65% of $X better than 0% of new $X. The substitution of leisure for income is a possibility, of course, but that would actually not be bad at all, if it succeeded in capping the amount of wealth for one family and created a gap into which someone else could step to earn money.

Finally, Bartlett suggests that we should do what Europe has done, suggesting that Europe has accepted the compromise of VATs as a conservative tax along with extensive social welfare spending from that tax. This is misleading, since Europe generally has a VAT as a supplement to the income tax (and, in the case of France at least, a bunch of other taxes as well). And it is disingenuous, since tax policies that Bartlett has supported (zero taxation of capital gains) or, apparently, VAT instead of an income tax, would not raise enough in revenues to fund the huge military obligations of Iraq and Afghanistan as well as an improved welfare state. Methinks Bartlett’s version of acceptable social welfare spending would be significantly lower than most progressives’.

There is a lot in Bartlett’s statement that is worrisome, but perhaps the most for me is the disregard for the impact of inordinate inequality on democracy. Most of us don’t think about democracy very often, and we seldom talk about it among diverse groups in ways that can enhance its institutions and its sustainability. A discussion of inequality that so completely disregards the impact of the kinds of gross inequalities that we are seeing more of in this country–where a CEO may earn in half a day what an average worker in his company earns in an entire year, where every single member of the national body that is most influential on our laws (the Senate) is in the highest bracket of the income tax and “rich” in any reasonable measure of the benefits and burdens of society that they bear– is itself cause for concern for our future.

Another writer this month had similar thoughts. Christopher Hayes ends his article on “The Great Leap”, a story of China and its growth and expansion as a world financial power, with the following paragraph comparing the trends in the U.S. and China.

We tend to view China as posing an alternative and threatening model for
the future, one that’s by turns seductive and repulsive, the source of envy and contempt. But after a while I wondered if we aren’t in some way converging with out supposed rival. China has managed the transition from a
repressive, authoritarian, impoverished country to an industrial, corporatist oligarchy by allowing a loud and raucous debate while also holding tightly onto power. Perhaps we are moving toward the same end from a democratic direction, the roiling public debate and political polarization obscuring the fact that power and money continue to collect and pool among an elite that increasingly views itself as besieged on all sides by a restive and ungrateful populace. Hayes, the Nation, Jan. 11/18, 2010, at 17.

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