Over the final few months of the election, In Theory will be asking policy experts to weigh in on the critical questions our presidential candidates should be addressing — but often aren’t. This week, we’re discussing tax policy solutions for wealth inequality.
In the years after the Great Recession, public discussion of the gap between the richest and poorest Americans has risen from a whisper to an uproar. Wealth inequality is one of the most talked-about issues in this electoral season.
After a surprisingly robust Democratic primary challenge from Sen. Bernie Sanders (I-Vt.), who made the widening gap between the top 1 percent and the rest of Americans the centerpiece of his campaign, Hillary Clinton has clearly taken the fight against inequality to heart (or at least to her campaign). Her platform includes proposals for a progressive tax structure with “fair share surcharges” on multimillionaires.
Donald Trump has spent much of his campaign railing against the rich and well-connected, but, in a nod to Republican orthodoxy, offered a tax proposal that would cut rates for top earners. And although he promised to close the “carried interest loophole,” which allows some investment managers to reduce the taxes they owe on investment gains, many of his other tax proposals — such as eliminating the estate tax and offering a tax deduction for child care — wouldn’t help most of the earners who fall into low-income brackets. These proposals further muddle the Republican stance on inequality, which has long been unclear. Can tax policies reduce inequality? And what specific policies should the next president embrace?
Scott Winship is the Walter B. Wriston fellow at the Manhattan Institute and the author of the forthcoming study “Poverty After Welfare Reform.”
Changes to the tax code certainly could reduce inequality, but the real question is whether we should try to reduce it. There is little evidence that we should.
Are American levels of inequality harmful? Some analysts claim that they hurt middle-class incomes or increase poverty. But child poverty is at an all-time low, and middle-class incomes are also at historic highs. Across developed countries, those with higher inequality have slightly higher middle-class incomes and less poverty.
Others argue — based on mobility measures constructed to look worse when inequality rises — that higher inequality causes lower economic mobility or leads to political inequality. In fact, research claiming that the rich get their way in Congress over other voters has been debunked; in truth, across most issues, rich, middle-class and poor Americans have similar policy preferences. And in the United States, mobility has remained flat while inequality has risen over the past generation. Areas of the United States with more income concentration at the top have no worse mobility than areas with low inequality. The same is true across countries — the best research indicates that low-inequality Sweden is no more mobile than the United States.
Still others, such as Nobel laureate Joseph Stiglitz, claim that higher inequality saps economic growth. The research on this question is all over the map, but studies by experts including Thomas Piketty and Emmanuel Saez indicate that countries with higher inequality growth tend to have higher economic growth too. Paul Krugman, another Nobel Prize-winning economist, put it well: “There just isn’t a striking, simple relationship between inequality and growth; all the results depend on doing fairly elaborate data massaging, which might be right but might also be teasing out a relationship that isn’t really there.”
To be sure, all this research provides little reason to think that marginally reducing inequality would worsen any of these outcomes. But it probably would not improve them either. Studies consistently find that the U.S. tax system is already among the most progressive in the world. Prioritizing inequality betrays indifference to policy outcomes and pure antipathy toward top earners.
In truth, nothing helps the poor and middle class like economic growth, and that is best pursued by policy reforms that ignore inequality. To promote growth, the next president should abolish corporate taxes and reform individual taxes to keep the overall burden of taxation the same across poor, middle-class and rich Americans. She should promote state and local reform of occupational licensing and land-use regulation. She should reform entitlements, including Obamacare, and reorient immigration policy in favor of admitting more higher-skilled and less lower-skilled immigrants. She should pursue a deregulatory agenda and nominate economists to the Federal Reserve Board of Governors who favor nominal GDP targeting, which prioritizes achieving desired growth rates over inflation targets and would tend to allow more wage growth.
Unfortunately, the distraction of inequality — or nationalism — makes it unlikely the next president will pursue any of these policies, and the poor and middle class will be worse off for it.