Going back up to Capitol Hill tomorrow to testify before the Senate Budget Committee on a great topic: Inequality, Mobility, and Opportunity.
I’ll post the testimony later, wherein I elaborate details and evidence, but here’s the breakdown as I see it.
There a lot more income inequality than there used to be. That means growth is less likely to reach the middle class and especially the poor. This blocks their opportunities to move up and out, and that shows up as stagnant mobility.
Putting together the findings suggests a hypothetical causal chain or even a negative feedback loop: from higher inequality, to reduced opportunity, to diminished mobility. Reduced opportunity —say, less educational access for children from lower income families — both reinforces high levels of inequality and further diminishes mobility.
This loop is particularly likely to occur when inequality diverts overall growth from low-income families, leading to high and persistent child poverty. Causally, this chain of events is likely to operate through everything from diminished access to quality education, starting with preschool (early educational interventions have been shown to have lasting positive impacts on later earnings and mobility), to inferior public services, like poor quality libraries and parks, to lack of health care, inadequate housing in underserved communities, and even a polluted physical environment.
To the extent that higher inequality and less mobility lead more children to be exposed to these risk factors, we may well find that as society grows ever more unequal, those falling behind are losing access to the ladders that used to help them climb over the mobility barriers they faced.
In the interest of avoiding further damage to the ability of disadvantaged families to escape the vicious cycle I elaborated, we mustn’t seek to get on a sustainable budget path by spending cuts alone. Such cuts will be part of the mix. Thus far, however, they have been the only ingredient in the mix.
In fact, discretionary programs that serve low- and moderate-income families—programs with the potential to promote income mobility, like Pell Grants—have already been the target of budget cuts. Head Start, Title I, and job training—programs that can also help families overcome mobility barriers—are also at risk. In the spirit of breaking the cycle of inequality, diminished opportunity, and immobility, Congress should avoid these cuts.
Turning to tax reform, allowing the high-end Bush tax cuts to expire at the end of this year, as President Obama has proposed, is consistent with both the balanced approach I advocate above and the reduction of after-tax inequality.
Ending the preferential tax treatment of income from capital and dividends is also consistent with the goals of both deficit reduction and moderating inequality. According to the JCT, for example, the cost of the tax breaks for capital gains and dividends is $450 billion over five years.
I’m aware that policy makers need to be mindful of behavioral responses to tax changes, but I assure you that the historical evidence of this point is very consistent. The main response to tax changes among high income or high wealth households appears largely unrelated to “supply-side” effects, like greater capital investment leading to higher productivity, wage, or job growth. Instead, beneficiaries of these tax cuts are more likely to rearrange their taxable income in ways to avoid taxation, such as the strategic timing of realization of capital gains.
In closing, I reiterate two points. First, by protecting those parts of the budget that offset poverty and promote opportunity, members can push back on the negative cycle I described above. Second, through expiration of the high end Bush tax cuts and ending preferential treatment of capital incomes, members of this committee can return progressivity to a tax code that has become considerably less effective as a levee against rising inequality.
More to come tomorrow…