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The litany of well-founded complaints about the latest tax
legislation seems endless. More complications for a tax code both
parties profess to want to simplify. New frontiers in using gimmickry
to hide the true cost of the legislation. Questionable usefulness in
sparking our economy. And another enormous hit to our horrifying
long-term fiscal outlook.
Add to this list one more pernicious aspect of the U.S. economy now
made worse: the huge gap in income among Americans, the widest of any
major country and not getting noticeably better. Americans have
become familiar with the headline-grabbing escalation of CEO pay
packages. But after a frisson of worrying in the mid-'90s, we seem to
have become inured to the record disparity of income across nearly
all professions and income levels.
According to a Federal Reserve study this year, pre-tax family
incomes of the top 10 percent grew by 19.3 percent between 1998 and
2001 after inflation, compared with 11.9 percent for the rest of
Americans. Last fall the Census Bureau found that by any of five
sophisticated measures, the gap in incomes has continued to widen.
Most discussions of income inequality properly center on pre-tax
statistics, in search of a true measure of how the labor markets and
the economy are functioning. Considering pre-tax income is also
proper because we should not legislate or redistribute our way to
income equality. But neither should tax policy worsen the disparity
between rich and poor.
Widening that gap is what we've just done. According to analysis by
the Tax Policy Center of the Brookings Institution and the Urban
Institute, the new tax provisions will raise the after-tax income of
Americans making more than $1 million by 4.4 percent while raising
the average American's income by only 1.8 percent. More than 70
percent of households will receive $500 or less. For 8 million
lower-income Americans who pay taxes, the news is truly dispiriting:
no tax cut at all.
That's because the bulk of the cut will be used to reduce capital
gains and dividend taxes, and even though ownership of stocks has
broadened in the past decade, the highest-income Americans still have
a disproportionate share of the wealth. In fact, distribution of
wealth is even more unequal than the distribution of income. In 1998,
47.3 percent of households' "net financial assets" resided
with the top 1 percent of Americans, according to an analysis of
consumer finance data by Edward Wolff.
Proponents of the tax bill decry such talk as class warfare. But is
it class warfare to talk about fairness? And if fairness isn't
enough, how about the social tensions and economic inefficiencies
that can result from such an enormous rich-poor divide? We have had a
progressive income tax for many years; why would we choose to make it
less progressive at this moment, when natural economic forces are
already driving us toward more inequality?
Those forces include many of the same winds that have given us high
productivity, low inflation and unprecedented prosperity over the
past decade, notwithstanding the current bump in the road. The
technological revolution and growth in the service sector increased
the need for skilled employees, while the downsizing of American
corporations as they became more efficient reduced the need for
unskilled workers. Classic labor market economics at work led us to
greater income inequality.
This year, BusinessWeek labeled economists who worry about income
inequality "declinists," meaning that they believe the
American economy isn't going to grow much so we should focus on how
to divide the pie rather than how to grow it.
That's disingenuous. Of course we shouldn't hold back economic growth
just to keep the rich from getting richer. And many of us believe
that our economy remains the most efficient and competitive in the
world, fully capable of resuming very satisfying growth after the
indigestion of the late '90s passes.
But achieving that growth potential and lessening income inequality
are not inconsistent. For example, investing in education and
training -- a concept given short shrift by the Bush administration
-- improves the quality of our workforce, which leads to higher
productivity, which leads to more economic growth. Along the way,
labor market economics work in our favor by shifting the supply of
workers from unskilled to skilled.
The massive tax cuts of the past two years mean no money for these
kinds of initiatives or for other kinds of public investments.
Indeed, the Bush administration has repeatedly proposed cuts in a
variety of antipoverty programs.
We shouldn't dismiss all tax cuts simply because they benefit the
wealthy. Double taxation of dividends is a source of economic
inefficiency, and eliminating it would be a laudable goal. But we
need balance, not a tax bill whose benefits are sharply tilted in one direction.
Policies that promote income inequality might also be tolerable if
they represented the best way to encourage economic growth. But this
tax cut hardly addresses today's need for more spending. It is aimed
primarily at the wealthiest Americans, who are already spending all
they want to, rather than putting money in the pockets of the
Americans most likely to spend it. With interest rates at record
lows, a lack of incentives is hardly what's holding back business
investment; it's anemic demand.
Some argue that income mobility obviates the unpleasant consequences
of income inequality. First, a number of studies have shown that
income mobility affects a minority of the population and that there
is little evidence it is increasing. But what's really significant is
that CEO John Smith (whose average pay went up 14 percent in 2002) is
making a far higher multiple of the income of waitress Mary Jones
than was the case in the past -- not the slim possibility that Mary
Jones can somehow move into a higher income bracket.
Some sketchy recent data suggest that income inequality may have
stopped worsening or perhaps gotten a little better as fierce efforts
by companies to cut costs reach higher-paid workers. Not only is it
too soon to reach that judgment but, even if it's true, the level of
inequality is so great that we certainly shouldn't be tinkering with
tax and spending policies in a way that makes it worse.
In 1971 the top 5 percent of Americans made about 6.3 times what the
bottom 20 percent made. In 2001, after 30 years of relentless
widening, that same group made 8.4 times what the bottom 20 percent
did. Income inequality in the United States is now not only at a
record level and not only the greatest since we began measuring it --
it is also on a par with that of a Third World country. Is that the
American dream? |
