Here’s a link to my written testimony submitted to the Senate Budget Committee and here’s the spoken part, all about inequality, opportunity, and mobility.
The Republican witnesses focused largely on how the numbers don’t support the views espoused by the D’s witnesses. Read them for yourselves if you want but I thought they were largely blowing smoke. The data that I emphasize below makes all the adjustments they ask for, and still shows sharp diversions in income growth between the top and everyone else (a point Chairman Conrad kept coming back to).
It’s true that de-Nile ain’t just a river, I guess, but at this point it’s more honest to accept that these trends are really occurring and explain why they’re not worrisome or why trying to fix them won’t work, etc.
Chairman Conrad, Ranking Member Sessions, I’m honored to testify before you today.
My testimony focuses on the urgent issues at hand, but first, let me lay out the facts as they are widely agreed upon by most analysts. I’ve tried, where possible, to use the most comprehensive income sources, ones that include the value of employer-provided health care, income and near-income transfers, realized capital gains, as well as sources that make adjustments for factors like changing household sizes over time.
All of these adjustments are made by the Congressional Budget Office in their income series, which, as you see in my Figure 1, reveals that income growth among the top 1% was much faster than that of middle or low-income households.
One reason why the incomes of the wealthiest households have surpassed the rest is because of the concentration of non-wage income, like capital gains and dividends.
Figure 3 from my testimony shows the concentration of capital income by income class. Note that 86 percent of all capital income accrues to the richest fifth of households while a subset of that–38 percent–goes to the 120,000 households in the very top 0.1 percent of the income scale.
The fact that this income receives extremely favorable treatment through our tax code—it’s currently subject to a top rate of 15% instead of the 35% levied on ordinary income—is one reason for its prominent role in the national inequality debate underway right now, a discussion which is motivated by the comparatively low rate of taxation on some prominent persons of phenomenal wealth.
How does this play out in our inequality trends? Figure 5 from my testimony shows the percent change in a measure of income concentration, again using comprehensive CBO data, comparing market, or pretax, incomes with income after taxes and transfers. The increase in inequality was ten percentage points higher when taxes and transfers are included.
Let me underscore this point: income inequality, according to CBO, rose 10 percentage points more quickly after taxes than before.
I now turn to linkages between the topics of today’s hearing: inequality, opportunity, and mobility.
Senators, I am deeply concerned that too many American families, particularly the poorest among us, are stuck in a vicious cycle, where high levels of inequality are preventing economic growth from reaching them as it did decades ago. But it is not just income growth I fear they’re missing out on—it’s opportunity.
Reduced opportunity —say, less educational access for children from lower income families — both reinforces high levels of inequality and diminishes economic mobility, making it harder for poor families to climb up to the middle class. This negative feedback 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 pre-school, 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.
My testimony cites numerous studies that strongly suggest this negative loop is already underway, particularly as regards the impact of poverty in early childhood. These studies examine specific ways in which diminished opportunity is playing out in the real world—including access to and completion of higher education, lower future earnings, premarital births, diminished cognitive development, and worse health outcomes.
I can think of nothing sadder and more wasteful than the inability of children to realize their potential. Yet that is the threat of this reinforcing negative loop—from higher inequality, to diminished opportunity, to immobility.
Finally, let me suggest the policy implications of the evidence I have presented thus far:
I am well aware of and supportive of this committee’s and its chairman’s commitment to putting this nation on a sustainable budget path.
But 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 that 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 this regard, I urge policy makers to be guided by principles put forth by both the Bowles-Simpson Fiscal Commission and the Gang of Six. These deficit reduction efforts recognized that cuts in key federal programs like SNAP and the EITC would increase poverty and hardship, and both decisively ruled such cuts out.
Both Bowles/Simpson and the Gang of Six highlighted as a basic guiding principle that deficit reduction should be achieved in ways that do not increase poverty. The Gang of Six, for example, instructed the Agriculture Committees NOT to meet their deficit-reduction target by substituting food stamp cuts for the savings those committees would be directed to produce in agriculture programs, and barred the tax-writing committees from cutting the EITC or Child Tax Credit to achieve the savings they were asked to produce through tax reform.
In fact, discretionary programs that serve low- and moderate-income families—programs like Pell Grants that play the role of upward ladders against stagnant income mobility—have already been the target of budget cuts. Head Start, Title I, and job training—programs that can also help families overcome mobility barriers—these too are 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.