Making Inequality Worse

October 25th, 2011 at 11:52 pm

One reason why all these Republican tax plans seem so dissonant is that they exacerbate the inequality trends generated by the increased concentration of market incomes—i.e., incomes from all market sources, before any taxes or transfer programs (like Social Security benefits, welfare, or unemployment insurance) kick in.

Think of the income distribution in two parts.  The first is the primary distribution of market outcomes, before any taxes or transfers take place.  The secondary is the distribution of household income after taxes have been collected and transfers handed out.

Nobody argues that the tax system should completely offset the dispersion of market outcomes, and many would probably argue that it’s not the purview of the tax code to redistribute much at all.  But neither would most people argue that the tax code should make the post-tax distribution more unequal.

Yet, that’s precisely what the Cain and Perry tax plans would do.  Cain’s plan is particularly egregious in this regard.  Perry’s plan wouldn’t have much effect on the poor and middle class, though it would cut taxes for the wealthy considerably.

I understand that many conservatives are less concerned than, say, I am, about the growth of unequal economic outcomes…the figure below shows the increase in after-tax income by income group from a rich new study by CBO.  But what is the rationale for making it worse?

In fact, the CBO study finds that while the level of inequality is always lower after taxes and transfers, income dispersion has increased more in the so-called “secondary distribution of income”—after taxes and transfers—than in the primary distribution (market outcomes):

“CBO estimates that the dispersion of market income grew by about one-quarter between 1979 and 2007, while the dispersion of after-tax income grew by about one-third.”

This suggests that while the primary distribution is generating more inequality, taxes and transfers, while still progressive, are doing less to offset it: “The equalizing effect of transfers and taxes on household income was smaller in 2007 than it had been in 1979.”

The R’s tax plans—and I’d strongly include the Ryan budget in this analysis, as it reduces transfers for the poor and cuts taxes for the wealthy–would exacerbate this problem by making the current tax and transfer system a lot less progressive.

I guess I know the answer to the question I posed above (why go here?), or at least I know the “benign” answer: cutting taxes on the wealthy will unleash waves of growth that will lift the rest.  But dress it up anyway you like–that’s just trickle down…and trickle down has a terrible track record.

You cut wealthy people’s taxes, you make them more wealthy, full stop.  Mind you, I’m not saying that’s a bad thing—I’m just saying that rich people not having enough riches is not this country’s problem right now.

It’s one thing for the political class not to deal with the real problems we face; it’s quite another for them to make them worse.

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6 comments in reply to "Making Inequality Worse"

  1. Fred Donaldson says:

    any taxes or transfer programs (like Social Security benefits, welfare, or unemployment insurance)

    Social Security benefits are not transfer payments, and are calculated and paid for by recipients, not taxing the wealthy. In fact, SS is regressive, since the more you pay into the fund, the less you receive in benefits. Folks at the bottom end of wages get 90%, and top earners get 15% in a three-tiered system.

    Social Security disability and SSI could be considered transfer payments, since what is received can be far less than contributed.

    Unemployment insurance is an historic way to allow companies to lay off employees for several months and then rehire them when they are needed. Without such insurance they would get another job or starve to death.

    During slavery, the “unpaid workers” would be supported during the winter, rather than letting them die, because there would nobody left to plant the crops in the Spring.


    • Fred Donaldson says:

      “can be far less than contributed.”

      I should have said “far more”.

      The redistribution often mentioned by economists should be regarded as what it often really is – subsidies for business (and eventually the wealthy owners.)

      For example, food stamps allow a company to pay workers far below reasonable wages, because government will provide food stamps, rent assistance, etc.

      A fair wage – like the $15 minimum in Australia – eliminates the need for most of these business welfare programs, but higher wages are opposed by those who benefit by underpaying people.


    • Michael says:

      That is the exact opposite of the meaning of the word “regressive.”


      • Fred Donaldson says:

        For a benefit it is regressive, and for a tax progressive. A progressive benefit would be higher amount for larger incomes, not the reverse.


      • Fred Donaldson says:

        To clarify, I should have said SS BENEFITS are regressive, since SS itself is a progressive program.


  2. USW Blog » Blog Archive » Rep. Ryan Reality Check says:

    [...] downplayed the increase in income inequality that’s gotten a lot of play out of the new CBO study. His claim is that there’s enough mobility in the American economy to offset any increase in [...]


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