Michael Barone
November 28, 2011 12:00 A.M.
Taxing high earners won’t make the poor less poor.
What should be done about income inequality? That basic question underlies the arguments hashed out in the supercommittee and promises to be a central issue in the presidential campaign.
Supercommittee Democrats argue that income inequality has been increasing and can be at least partially reversed by higher tax rates on high earners. They refused to agree on any deal that didn’t include such tax increases.
Supercommittee Republicans offered a plan to eliminate tax preferences and reduce tax rates, as in the 1986 bipartisan tax reform. They argued that high tax rates would squelch economic growth.
They didn’t make the case that their proposals would also address income inequality. But House Budget Committee Chairman Paul Ryan, in a 17-page paper based largely on a Congressional Budget Office analysis of income trends between 1979 and 2007, has done so.
Ryan, a Republican from Wisconsin, makes the point that the government redistributes income not only through taxes but also through transfer payments, including Social Security, Medicare, food stamps, and unemployment benefits. The CBO study helpfully measures income, adjusted for inflation, after taxes and after such transfer payments.
Many may find the results of the CBO study surprising. It turns out, Ryan reports, that federal income taxes (including the refundable Earned Income Tax Credit) actually decreased income inequality slightly between 1979 and 2007, while the federal payroll taxes that supposedly fund Social Security and Medicare slightly increased income inequality. That’s despite the fact that income tax rates are lower than in 1979 and payroll taxes higher.
Perhaps even more surprising, federal transfer payments have done much more to increase income inequality than federal taxes. That’s because, in Ryan’s words, “the distribution of government transfers has moved away from households in the lower part of the income scale. For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers.”
In effect, Social Security and Medicare have been transferring money from low-earning young people (who don’t pay income taxes but are hit by the payroll tax) to increasingly affluent old people.
The Democrats, perhaps following the polls and focus groups, have been protecting these entitlement programs, which have done more to increase income inequality than the Reagan and Bush tax cuts put together.
Ryan makes three more points that may strike many as counterintuitive.
First, reductions in some transfer payments haven’t hurt the living standards of most low-earners. The prime example is the welfare reform act of 1996, which reduced transfers to single mothers but induced many of them to find jobs that left them better off economically and, probably, psychologically.
Second, Americans aren’t trapped in one segment of the income distribution. A Tax Journal analysis of individual income-tax returns found that 58 percent of those in the lowest income quintile in 1996 had moved to a higher income segment by 2005. This comports with common experience. We move up and down the income scale in the course of a lifetime.
Read the rest here.
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Sorry, when the top 1% see a wage increase of over 300% in the last 20 years and the rest see 8.4% (adjusted for inflation) saying taxing the rich more wouldn’t reduce inequality is simply nonsensical. Transfer payments may indeed reduce equality, but that is easily mitigated by disqualifying people making over $x a year.
TJWP – you’ve missed the entire point. Redistribution has been tried, and is actually increased inequality. That is the point of the article.
One day you freely admit gov’t is inefficient and then the next day you write as if the gov’t can just take money from one person and give it to another, and that it would actually work to reduce inequality.
No, re-read the article. It says it increases inequality by redistributing income to wealthy seniors. If you have identified the problem in redistribution it is an easy fix. You need to earn less than $x a year to be eligible for subsidies.
Claiming redistribution doesn’t decrease inequality because you take money and “redistribute” it to wealthy people seems somewhat retarded don’t you think?
Again, the problem is the way the system is structured.
Yes, and the article continues to say that transfer payments to the wealthy should be decreased.
Furthermore, if you tax the wealthy to reduce inequality, where do you suppose those taxes will go?
Will they be used to stimulate the economy? (Remember the multiplier effect vs. the effect of tax cuts, per our previous discussion).
No, your proposal requires stealing money from one person to reduce his overall income in order to reduce the size of his income compared to someone with a smaller income. Please explain how that improves the economy and improves the lives of the poor or near poor.
The fact of the matter is the marginal propensity to save is much much lower when you are poor because you spend a significantly larger proportion of your income on things you need to live, which means your income is spent at the same time you earn it, whereas wealthier folks are much more likely to save additional income.
If we are going to talk about stealing money, we should really examine how these rich people are making their money. Is HFT stealing money? Are day-traders? Is taking deposits and paying less interest than you earn? This is now how we should discuss taxes, nor how people earn their income as it is inherently counter productive.
We can save the argument about the multiplier effect for another night, as I believe a lot of that has to do with credit expansion (fractional lending) and am conducting some research into this.
Please do not misunderstand. I COMPLETELY agree under the current system this tax revenue will be wasted as the political class is full of self-serving clowns. Taxing more in the current political climate is simply a way to not cut inefficient spending, I am 100% with you there. But I do not want to see the poor of America bear the brunt of this (I, by the way, have no vested interest in this as I am neither poor nor American).
However, I still contend that in an ideal society (aka in theory) we will help those less fortunate than ourselves even if there is some inefficiency involved in doing so.
Besides, much better our current system of taking money from everyone and giving it to the richest people. That seems to be working much better.
Additionally, the real measure is the marginal utility of extra income earned. For example:
Take $1000 from a millionaire and transferring it to a poor person who, factor in government inefficiency, receives $(1-d)(1000) where d (0,1).
I contend the millionaires decrease in utility from losing $1000 in income will be significantly less than the corresponding utility increase of the poor person from receiving $(1-d)(1000) as most of that additional income will go towards food, shelter, transport and clothing. Thereby the transfer payments can be shown to make society better off as a whole.
Also this all comes down to what should our spending priorities be? I prefer people don’t starve and don’t believe that they choose to be poor to milk the system (by-in-large).
Sorry for the multiple responses. Should all have been one.
People are not starving. There is much aid for low income and no income people.
The question is, “will increasing taxes on the rich help or hurt the greater economy?” It won’t change a rich person’s life much either way to bump their taxes a bit.
There is some rate of taxation that results in maximum government revenues. Tax too much and people shut it down. Tax too low and the obvious problem happens. Raising taxes does not always increase tax revenues. People make adjustments to their lives, people close businesses, reduce their incomes to avoid taxation. This hurts the unskilled worker more than helps.
Please see food stamp usage and tell me again people aren’t starving.
TJWP, man, you continue to ignore the exponential increase in entitlement spending. The data belies your conclusion that our spending priorities are not focused on the poor or near poor. There is simply not enough money to continue the current level or future predicted increased level of spending.
See the other response. I do not ignore it, or refuse to admit it is a problem. It quite clearly is. However to characterize it as the only problem, or the sole primary cause of the fiscal woes of the USA is simply ludicrous.
Again I simply fear the brunt will be born by the poor as they have little to no voice in the current political climate.
I must now, unfortunately, be off to get some much needed exercise. However, I do eagerly await your response as I much enjoy the discourse.
Additionally, if you are open to it, I would love to do a form of “blog debate” where we can take opposite sides and post some data/research so people can see the argument as a whole. I feel we are, by in large, good counterbalances since we have agreed on the main points but seem to approach the solution from opposite sides of the political spectrum. Please let me know, if you follow me on twitter I will DM you my email.
“First, reductions in some transfer payments haven’t hurt the living standards of most low-earners. The prime example is the welfare reform act of 1996, which reduced transfers to single mothers but induced many of them to find jobs that left them better off economically and, probably, psychologically.”
Lets take a single data point, point to it, call it a trend, then base policy on it.
“The prime example” implies there are more examples.
Unless you have 30+ data points you cannot, by definition, produce statistically significant results.
Yet liberal economic policy continues to push policies which may have only one or two data points to back it up. Or even worse, it is all theory, never having been tried in real life.
This isn’t about democratic or republican – its about dumb or smart. You have read enough of my stuff to know I have the upmost distain for policy makers from both parties.
The unfortunate thing for us macroeconomists is we can’t really run experiments so we are just left to tinker with our models. Well, that and retarded politicians love to take findings out of context to push their own agenda.
Lest we forget the increase in entitlement “give backs” to the multiple huge industrial corporations in the USA who pay no taxes.
Since corporations = people, are republicans upset about corporate welfare?
We should be upset any time the gov’t attempts to pick winners or losers through redistribution.
WS, thank you and Che$$ for retaining my readership here at IBc FN.
Naturellement, LeFly aussi/too.
Social Security and Medicare are transferring money to the elderly!?!
I’m shocked. Who came up with such a crazy system?
I used to advocate “respecting” America’s wealth.
Meaning, don’t let the “Fed” (gov. steal your family’s wealth).
But, as I’v been mocked, ridiculed and belittled by many of different feathers, I realize, U’re “Un” American.
So… . … . To HELL with You.. XD
Having dealt with such descendants and “heirs” (a fitting rhyme with “welfare:), perhaps HOBO
HOBOama, might be, hm… correct???
Gift away American Bastid’s wealth to putrid 3rd world boxxxers and strippers who will make more MLK-like statues in his Sunny Boyz of a Bastid’s Image, insulting the people’s tax paying money and history.
The more “we” go at it, I say keep digital prints a’ ready.
The more S$M this country’s “sons” become, the more its reverent Sons find reason for disgust.
BTW: Take a concrete slab and bury into your dominant foot.