Elizabeth Warren, David Leonhardt, Redistribution, and Predistribution
I just had an unusual experience. I was convinced by an op-ed. One third of the way through “Elizabeth Warren Actually Wants to Fix Capitalism” by David Leonhardt, I was planning to contest one of Leonhard’s assertions. Now I am convinced.
The column praises Elizabeth Warren. Leonhardt (like his colleague Paul Krugman) is careful to refrain from declaring his intention to vote for her in the primary. I am planning to vote for her. I mostly agreed with the column to begin with, but was not convinced by Leonard’s praise of Warren’s emphasis on aiming for more equal pre-fiscal distribution of income rather than just relying on taxes and transfers to redistribute.
In particular, I was not convinced by
This history suggests that the Democratic Party’s economic agenda needs to become more ambitious. Modest changes in the top marginal tax rate or in middle-class tax credits aren’t enough. The country needs an economic policy that measures up to the scale of our challenges.
Here two issues are combined. One is modest vs major changes. The other is that predistribution is needed in addition to redistribution, as discussed even more clearly here
“Clinton and Obama focused on boosting growth and redistribution,” Gabriel Zucman, a University of California, Berkeley, economist who has advised Warren, says. “Warren is focusing on how pretax income can be made more equal.”
The option of a large change in the top marginal tax rate and a large middle class tax credit isn’t considered in the op-ed. I think this would be excellent policy which has overwhelming popular support as measured by polls (including the support of a large fraction of self declared Republicans). I note from time to time that, since 1976 both the Democrats who have been elected president campaigned on higher taxes on high incomes and lower taxes on the middle class (and IIRC none of the candidates who lost did).
This is also one of my rare disagreements with Paul Krugman, and, finally one of my rare disagreements with Dean Baker (link to a book which I haven’t read).
After the jump, I will make my usual case. But first, I note Leonardt’s excellent argument for why “soak the rich and spread it out thin” isn’t a sufficient complete market oriented egalitarian program. It is phrased as a question.
“How can the next president make changes that will endure, rather than be undone by a future president, as both Obama’s and Clinton’s top-end tax increases were?”
Ahh yes. High taxes on high income and high wealth would solve a lot of problems. But they will be reversed. New programs such as Obamacare or Warren’s proposed universal pre-K and subsidized day care will not. Nor will regulatory reforms such as mandatory paid sick leave and mandatory paid family leave. I am convinced that relatively complicated proposals are more politically feasible, not because it is easier to implement them, but because it is very hard to eliminate programs used by large numbers of middle class voters.
I’d note that I had already conceded the advantage of a regulatory approach which relies on the illusion that the costs must be born by the regulated firms. Here I note that fleet fuel economy standards are much more popular than increased gasoline taxes. One is a market oriented approach. The other is one that hides behind the market as consumers don’t know that part of the price of a gas guzzler pays the shadow price of reducing fleet average milage.
OK my usual argument after the jump
It is unusual for me to disagree with Baker, Leonhardt, and (especially) Krugman. I am quite sure that the Democratic candidate for president should campaign on higher taxes on the rich and lower taxes for the non-rich.
To be sure, I can see that that isn’t the only possible policy improvement. Above, I note the advantages of hiding spending by mandating spending by firms and of creating entitlements which are very hard for the GOP to eliminate. I’d add that we have to do a lot to deal with global warming. Competition policy is needed for market efficiency. I think unions and restrictions on firing without cause have an effect on power relations which is good in addition to the effect on income distribution.
But I don’t understand the (mildly) skeptical tone. I will set up and knock down some straw men
1) Total straw — US voters are ideological conservatives and operational liberals. They reject soaking the rich, class war, and redistribution. To convince them to help the non rich, one has to disguise what one is doing.
This is especially silly, and no one in the discussion argues this (anymore — people used to argue this). The polls and elections are clear. US voters want higher taxes on high incomes and on the wealthy. Also Congress has gone along — the effective tax rate on the top 1% was about the same after Obama as before Reagan
2) Extremely high marginal tax rates are bad for the economy. Here this is often conceded, in particular by people arguing for modest increases in the top marginal tax rate. The claim is not supported by actual evidence. In particular the top rate was 70% during the 60s boom.
3) High tax rates cause tax avoidance. This reduces efficiency and also means that they don’t generate the naively expected revenue. There is very little evidence that this is a huge issue. In particular there was a huge increase in tax sheltering after the 1981 Kemp-Roth tax cuts and reforms. It is possible to design a tax code which makes avoidance difficult (as shown by the 1986 Kemp-Bradley tax reform). It is very hard to implement such a code without campaigning on soaking the rich and promoting class uh struggle.
4) More generally, redistribution does not work — the post tax income distribution is not equalized because the rich find a way. This is super straw again. All the international and time series evidence points the other way.
I don’t see a political or policy argument against a large increase in taxes on high incomes (70% bracket starting at $400,000 a year) used to finance a large expansion of the EITC (so most households receive it).
I think a problem is that a simple solution does not please nerds. I think another is that a large fraction of the elite would pay the high taxes and it is easier to trick them into trying to make corporations pay the costs.
But I really don’t understand.
First, whenever anybody (that I hear or read) talks about what to do with the revenue from higher taxes on the rich, they always suggest this or that government program (education, medical, housing). I always think of putting more money back in the pockets of my middle 59% incomes to make up for the higher consumer prices they will have to pay when the bottom 40% get unionized.
Of course the 59% can use that money to pay taxes for said government programs — money is fungible. But, that re-inserts an important element or dimension or facet which seems perpetually forgotten (would not be in continental Europe or maybe French Canada).
Don’t forget: predistribution goal = a reunionized labor market. Don’t just look to Europe for redistribution goals — look at their predistribution too.
Nobody in the 60’s that was taxed at a marginal 70% rate paid 70%. The top effective rate was about 32-38%, which was far higher than today, but you get the point. The income tax code was as much control of where investment would take place as much as anything………..Ronald Reagan whined about this for years. Shove it grease ball. There was a reason why.
Redistribution won’t work because the system is a debt based ponzi scheme. The US really hasn’t grown much since 1980, instead you have had the growth in debt.
You need to get rid of the federal reserve system’s banks control of the financial system, which they have had since the 1830’s in terms of national control(from Hamilton’s Philly, which was the financial epicenter before that) and de Rothschild free since the 1930’s(when the bank of de Rothschild ala the Bank of England’s reserve currency collapsed). Once we have a debt free currency that is usury free, then you can develop and handle intense changes like ecological problems ala Climate Change, which the modern plutocrats cannot and will not solve.
They have been ramming debt in peoples face since 1950 and since 1980 it has gotten vulgar. They know they are full of shit and can’t win a fair game.
Would you agree a secure healthcare system without work requirements for those who can not afford healthcare is a form of pre-distribution of income? Today’s ACA was only a step in the right direction and is being tampered with by ideologs to limit its reach. It can be improved upon and have a socio-economic impact on people. Over at Medpage where I comment on healthcare, the author makes this comment:
“Investing in improvements in patients’ social determinants of health — non-medical areas such as housing, transportation, and food insecurity — is another potentially big area, he said. “It’s a major opportunity for plans to position around this and make it real. The more plans can address social determinants of health, [the more] plans can become truly organizations dedicated to health as opposed to organizations dedicated to incurring medical costs, and that to me is a bright future and a bright way to position the industry.”
Many of the “social determinants of health” are not consciously decided by the patient and are predetermined by income, social status or politics, and education. What is being said in this paragraph makes for nice rhetoric and is mostly unachievable due to the three factors I suggested. And yes, you can make some progress. People can make healthy choices once the pre-determinants to doing so are resolved.
Another factor which was left dangling when Liebermann decided to be an ass is Long Term Healthcare for the elderly and those who are no longer capable. Medicare is only temporary and Medicaid forces one to be destitute. There is a large number of people who are approaching the time when they will need such healthcare till death. We have no plans for this tsunami of people.
The tax break was passed using Reconciliation. In 7-8 years out, there is a planned shift in taxes to be levied on the middle income brackets to insure the continuamce of Trump’s tax break for the 100 or so thousand households it was skewed towards. If not rescinding the tax break then it should be fixed so it sunsets as did Bush’s tax break due to its budget creating deficit. Someone running for the Pres position should be discussing this and pointing out how Republicans have deliberately undermined the middle income brackets.
We should not limit solutions to just income when there are so many areas we are lacking in today.
I guess I consider food stamps, Medicare, Medicaid, Social Security old age pensions and disability pensions to be redistribution. My distinction is whether it is tax financed. Providing goods or services as in Medicare and food stamps seems to me basically the same as providing cash as in TANF and old age pensions.
There is also a difference between means tested and age dependent eligiability, but I don’t consider it fundamental.
I assert that Medicare (especially plan B) is a kind of welfare basically like TANF and food stamps.
(and look forward to a calm and tranquil discussion of that opinion).
Medicare is 41% funded by general revenues. The rest comes from payroll taxes and beneficiary premiums. Advantage plans cost more than traditional Medicare for providing the same benefits and also extract a premium fee. I do not believe I have been mean to you. I usually question to learn more. I am happy to have your input.
I am writing for Consumer Safety Org on Woman’s healthcare this time and also an article on the Swiss struggling to pay for cancer fighting drugs.
I am always looking for input.
OOops. I didn’t mean to suggest you have ever been mean to me. I don’t recall anything like that.
It’s just that I thought calling Medicare and Social Security old age pensions welfare like TANF and food stamps would cause an angry reaction from other regulars.
I am disappointed that I don’t seem to have provoked anyone. I think very few people are reading these comments.
Since I am the only one left of the bunch who has talked about SS, and over a decade ago it was Orzag-Diamond on Economists View until Bruce started talking to me, it is true few would come back with points of discussion. I have not seen Dale Coberly in a while either. Since neither are here to defend SS, it falls upon me to do so. SS is still fully funded by employee contributions if one also believes employer contributions are part of that payroll contribution which Employers would do so. It is difficult to call it welfare when fully funded by people. Medicare on the other high is almost 50% funded by general revenues which could be changed if the waste was cut as Dr Berwick suggested.
JAMA pointed out that 50% of the increase of $1 trillion in healthcare cost from 1996 to 2013 was due solely to price increases. NEJM in a more recent study citing the same JAMA study stated from 2007 to 2014, hospital-prices for inpatient care grew 42 percent compared to 18 percent for physician-prices for inpatient hospital care. For hospital-based outpatient care, hospital-prices rose 25 percent compared to 6 percent for physician-prices. Hospitals led the increased costs resulting from consolidations pointing the finger at the formation of ACOs.
I think people do read here. We do go through our cycles. We do attract.
Run, I think your point about medical pricing is important. The providers basically pull their numbers out of thin air. Their major importance to the providers is as a starting bargaining position with insurers and Medicare/medicaid. Uninsured’s get caught in the switches created by these made up numbers. In the case of “non profit” hospitals, the magic numbers are used for bullshit arguments to the state about how much “charity” care they provide. Lewis Carroll would love the system.
Robert and Run
I am not sure I can meet Robert’s “non angry” criterion. I find it difficult to find words that do not betray what I think of the opinions offered by people who choose to ignore facts.
Social Security is paid for entirely by the people who will get the benefits. This includes the so-called “employer”s share” which is simply subtracted from what would otherwise be the employee’s pay. People can argue about that, but the fact is it that the emp[oyers will argue, when it suits them, either that Social Security is entirely “a jobs destroying tax” or that “the return on investment from Social Security is lower than some (imaginary) discount rate, therefore you should give up your Social Security and invest in the stock market.”
All this is just distraction from the fact that Social Security is INSURANCE paid for by the workers. And it is politically essential that it remain that way.
Robert and others who are happy with the idea of European style Social Welfare don’t seem to understand that anything that can be called “socialism” (whether it meets any academic definition of socialism or not) is the other third rail in American politics… one that is still hot. Moreover, should the current “blue wave” actually turn SS into “socialism-lite” by “forcing the rich to pay their fair share” (they already do… they pay the same insurance premium for the same insurance as everyone else) they will give “the rich” the opportunity they have been longing for since SS was invented: put it in the regular budget so we can cut it at will (“we have the will but not the wallet” as Bush Sr said about welfare in his day.”
As for medical care, that could, and should, also be paid for entirely by the people who will get the benefits. “making the rich pay” for half of it just exposes it to perpetual political talk which drowns out any possibility of coming up with an actual solution to the health care needs of the people.
This would cost the people a few dollars. ONE extra dollar per week per year in the case of Social Security (to meet presently projected future needs if we actually do end up living longer). And roughly three to five percent more for Medicare while cutting the same peoples private medical insurance costs at least an equal amount. With the important benefit that by paying for their future health care (insurance) need from present income, they will spread the cost over many more years and actually be able to count on the health care when they will need it more and be able to pay for it less.
Sorry if that all sounds too angry for Robert. I would be glad to learn how to sound not angry.
Also sorry if I have not made my case very well. Hard to do in a short paragraph. Probably impossible to do for someone else: you have to make the case for yourself, and that takes a little time and effort.
The real reason for having high marginal tax rates isn’t primarily to collect more tax money. It’s to direct corporate and wealthy individuals to spend their money in certain ways that are more likely to benefit society than driving up asset prices. If there were a 90% rate on high salaries, giving workers a raise would only cost 10 cents on the dollar with the federal government paying the remaining 90 cents. Advanced research or charitable outreach programs would be similar.
Even capital gains, taxed at half that rate, would be viewed differently. Right now, the tax rate is so low, that there is no point in holding an investment more than a year and a day given the way the capital glut has been driving up ownership asset prices. A much higher rate and a longer holding period would either increase government revenues or increase actual investment.
In fact, one might argue that since higher marginal tax rates aren’t likely to result in higher government tax revenue, they can’t harm the private sector.