Posts Tagged ‘redistribution’

distribution

Liberals have a problem: the kinds of redistribution they advocate and support just don’t do a lot to fundamentally alter the profoundly unequal distribution of income in the United States.

Consider the chart above, which illustrates the cash-income effects of the U.S. tax system (with dark colors marking the pre-tax distribution of income and the lighter colors the post-tax distribution). The results are quite meager: in 2014, the share of the top 1 percent (blue lines, measured on the right) was only lowered from 20.2 percent to 17 percent, while the share of the bottom 90 percent (plum lines, measured on the left) rose from 53 percent to just 59.2 percent.

So, even after all the tax-based redistributions are completed, the top 1 percent still ends up with a larger and larger share of income—and the share left over for the bottom 90 percent continues to fall.

All of that political fighting over tax rates and government programs to ameliorate the unequalizing effects of American capitalism and that’s all we end up with.

It should come as no surprise then that Isabel Sawhill [ht: ja] concludes that changing the tax structure, even radically, won’t really change much.

Sawhill’s analysis of both the political hurdles and the limited benefits of progressives’ favorite tax-and-spend schemes is certainly accurate. Existing economic institutions produce such an obscenely unequal distribution of income in the United States that it’s difficult to envision any political feasible changes in the tax structure that will bring down inequality into a region that progressives would consider fair and just.

So, what’s the alternative? Sawhill favors “stakeholder capitalism” (or what others have called “shared capitalism”):

It means paying attention not just to shareholders but also to workers, customers, and the community. It has proven to be a successful strategy for many companies. They have showcased what can be accomplished when the private sector takes greater responsibility for helping workers—whether in the form of profit sharing, training, or providing benefits such as paid leave and flexible hours. The fact is that without such an approach, it will be difficult to achieve broadly based economic growth. It would simply require too much redistribution after the fact. We need instead to test the limits of equalizing the distribution of market incomes before taxes and benefits enter the picture.

And perhaps Sawhill and other American liberals can convince employers to become “high-road,” stakeholder employers instead of taking the “low-road” of the shareholder economy.

Perhaps. But why does Sawhill limit the discussion to the choices existing employers might or might not want to make? Why not open up the discussion to consider other ways of organizing enterprises?*

I’m thinking, for example, of worker cooperatives and other kinds of enterprises owned by workers and the communities in which they live. If we think the existing distribution of income is fundamentally unjust and redistributive efforts are generally limited and ineffective—both of which are arguments that Sawhill herself makes—then why not focus on ways of actually improving the initial distribution without requiring the assent of existing employers?

The advantage of worker- and community-owned enterprises is they include the stakeholders from the very start. The stakeholders are the ones who decide how the firms will be organized, what the workers will be paid, how the surplus funds will be allocated, and so on. And from all the existing examples we have, from Cleveland’s Evergreen to Spain’s Mondragón, the initial distribution of income would be much more equal than anything we’ve seen, not only in the past few decades, but over the entire modern history of the United States.

Then, on top of that, people might want to have a tax-based redistributive scheme—for example, to correct for differences in enterprise success, regional discrepancies, and so on. But such redistribution would be much easier and more effective than anything Sawhill and others envision for the United States today. It just wouldn’t have an enormous mountain of inequality to dismantle.

So, while I agree with Sawhill that “our failure to achieve anything close to broadly based economic growth in the United States is very troubling,” I want to expand the discussion and see a much bigger role for alternatives to capitalism in distributing the rewards to workers and the members of the communities in which they live.

That one change, in the direction of more worker- and community-owned enterprises, can serve as the basis of an economy that would produce an array of incomes that brings us much closer to an initial distribution that many progressives consider fair and just.

 

*As Penn Loh explains,

Too often “the economy” is equated with markets where corporations compete to make profits for the wealthiest 1 percent and the rest work for a wage or salary (or don’t make money at all). . .

When everything that we label “economic” is assumed to be capitalist — transactional and market-driven — then it is no wonder that we run short on imagination.

To escape this “capitalocentrism,” we need to broaden the definition of economy beyond capitalism.

Inequality

The latest IMF Fiscal Monitor, “Tackling Inequality,” is out and it represents a direct challenge to the United States.

It’s not just a rebuke to Donald Trump, who with his allies is pursuing under the guise of “tax reform” a set of policies that will lead to even greater inequality—or, for that matter, Republicans in state governments across the country that have sought to cut back on programs targeted at poor Americans. It also takes to task decades of growing inequality in the United States, under both Democratic and Republican administrations.

As is clear from the chart above, the distribution of both income and wealth in the United States has become increasingly unequal since the mid-1970s. The share of income captured by the top 1 percent has more than doubled (from 10 to 20 percent), while it’s share of total wealth has increased dramatically (from 23 percent to 39 percent). Meanwhile, the share of income of the bottom 50 percent has declined precipitously (from 20 percent to 12.5 percent) and it’s share of wealth, which was never very high (at 0.9 percent), is now nonexistent (at negative 0.1 percent).

And what is the United States doing about it? Absolutely nothing. Over the course of the past four decades it’s done very little to tackle the problem of growing inequality—and what it has done has been spectacularly ineffective. Thus, inequality has grown to obscene levels.

What’s interesting about the IMF report is that it raises—and then challenges—every important argument made by mainstream economists and members of the economic and political elite.

Should we worry just about income inequality? Well, no, since “changes in income inequality are reflected in other inequality dimensions, such as wealth inequality.”

redistribution

Doesn’t the United States take care of the problem by redistribution? Absolutely not, since only Israel does less than the United States in terms of lowering inequality (as measured by the Gini coefficient) through taxes and transfers.

But doesn’t tackling inequality through progressive income taxes lower economic growth? Again, no: “There is not strong empirical evidence showing that progressivity has been harmful for growth.”

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Nor is there any justification for low tax rates on those at the top in terms of social preferences. Most Americans, according to a recent Gallup survey, most believe that the rich and corporations don’t pay their fair share of taxes. In fact, the IMF notes, perhaps thinking about the United States, “societal preferences may not be reflected in actual policy implementation because of the concentration of political power in certain affluent groups.”

Clearly, much more can be done to lower the degree of inequality in the United States.

As a sign of the times, the IMF even chooses to discuss the role a Universal Basic Income might play in decreasing inequality.

Proponents argue that a UBI can be used as a redistributive tool to help address poverty and inequality better than means-­tested programs, which su er from information constraints, high administrative costs, and other obsta­cles that limit benefit take-­up. A UBI could also help address increased income uncertainty resulting from the impact of technology (particularly automation) on jobs.

UBI

According to its calculations, a Universal Basic Income in the United States (calibrated at 25 percent of median per capita income, in addition to existing programs) would cost only 6.5 percent of national income and achieve a remarkable reduction in both inequality (by more than 5 Gini points) and poverty (by more than 10 percentage points).

What puts the United States in stark relief is the contrast between the whole panoply of inequality-reducing policies that are available—from more progressive income taxes and the adoption of wealth taxes to reducing gaps in education and health programs—and the fact that the United States is moving in the opposite direction.

The United States is simply not tackling the problem, with the inevitable result: current levels of economic inequality are—by any measure, and especially in comparison to what could be but isn’t being done—grotesque.

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March 8, 2017

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Dean Baker, like many others in recent years (such as Joseph Stiglitz, Josh Bivens and Lawrence Mishel, and Paul Krugman), tries to make sense of the “well-documented upward redistribution of income” that has been taking place for the past four decades in terms of rents.

What Baker has in mind are four categories or areas of rent: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals.

Now, I have no problem accepting the idea that rents have been captured by corporations and individuals within corporations in all four of those areas. In fact, I’d extend the list to include, at a minimum, the following: pharmaceuticals, insurance, and real estate.

But I think Baker makes at least two fundamental mistakes: First, he counterposes his rent story to a focus on a redistribution from labor to capital. Second, he wants to argue that there’s “nothing intrinsic to capitalism that led to this rapid rise in inequality.” The two problems are, in fact, connected.

Let me explain. What Baker is missing in his rent story is an explanation of where the rents come from. He does have a theory of prices, since rents can be explained as stemming from above-normal or monopoly prices. But he needs a theory of value, in order to explain where the surplus that is ultimately captured as rents is initially created. In other words, what he’s missing is a theory of surplus-value.

And that surplus-value is, of course, something that is intrinsic to capitalism. Capitalism simply can’t exist, in any of its various forms, without the appropriation and redistribution of surplus-value. One of those sets of redistributions takes the form of rents.

Why does this matter? In Baker’s view, it is necessary “to restructure the market to generate qualitatively different outcomes” while leaving capitalism in place. It’s like rearranging the chairs on the deck of the Titanic. Ultimately, the ship sinks and only a select few get away in lifeboats.

The theory of surplus-value is connected to a fundamentally different project: the critique of capitalism itself. In other words, the goal is to eliminate exploitation and any redistributions of the surplus that aren’t connected to creating and strengthening nonexploitative economic arrangements. To continue my analogy, what we need is a radically different kind of ship, one that can do a much better job of steering clear of icebergs and of protecting the people on the ship even if such an obstacle is encountered.

What would happen if the United States raised taxes on the rich?*

Well, as it turns out, it wouldn’t do a whole helluva lot to improve the distribution of income. That would barely change. But the United States would be able to generate significant additional federal revenues—enough to fund a lot of new government programs to help the working-class.

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Let’s start by considering what has happened to federal income tax rates over the years. As is clear from the charts above (using the handy interactive calculator here), the effective tax rates for middle-income households and for those at the top both fell in the postwar period. But the rate fell much more at the top than in the middle (or, for that matter, the bottom). Thus, for example, the effective tax for households bringing in $50 thousand a year fell from 24 percent in 1945 (when the inflation-adjusted income was $3,920) to 13.3 percent in 2012—while the rate for households with an income of $10 million fell from 90.8 percent in 1945 (on an inflation-adjusted income of $783,996) to 34.7 percent in 2012.

Clearly, the small group at the top has enjoyed an enormous decrease in federal income tax rates on their share of the surplus during the postwar period, especially beginning in the early 1980s.

So, to repeat my question, what would happen if the United States reversed that trend and raised taxes on the rich?

According to a recent study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag, an increase in the top marginal tax rate would not make the distribution of income significantly less unequal. For example, increasing the top income tax rate from 39.6 to 50 percent (which would raise taxes an additional $6,464, on average, for households in the 95-99th percentiles, an additional $110,968 for households in the top 1 percent, and an additional $568,617 for households in the top 0.1 percent) would only lower the Gini coefficient in the United States from 0.574 under current law to 0.572. And consider this: even if all of the additional revenue collected were redistributed evenly to households in the bottom 20 percent (thus $95.6 billion in revenue from an increase in the top rate to 50 percent, which would lead to an additional $2,650 in post-tax income for the bottom fifth of households), the Gini coefficient drops by less than .01 (to 0.565). In neither case does an increase in the top federal income tax rate substantially alter the unequal distribution of income.**

However, as Patricia Cohen points out, raising taxes on the rich would serve to increase federal revenues—by a significant amount. Thus, for example, raising the effective tax burden on the top 1 percent from 33.4 percent today to 45 percent (in other words, close to what it was in 1986) would generate about $276 billion in revenue just in the first year.

Even more:

If the tax increase were limited to just the 115,000 households in the top 0.1 percent, with an average income of $9.4 million, a 40 percent tax rate would produce $55 billion in extra revenue in its first year.

That would more than cover, for example, the estimated $47 billion cost of eliminating undergraduate tuition at all the country’s four-year public colleges and universities, as Senator Bernie Sanders has proposed, or Mrs. Clinton’s cheaper plan for a debt-free college degree, with money left over to help fund universal prekindergarten.

Clearly, taxing the rich has enormous potential in terms of financing new programs to benefit the American working-class. But it’s also not enough.

The fact that increasing the tax rate on the top groups would not significantly alter the distribution of income but, yet, generate enormous tax revenues is evidence of just how obscenely unequal the existing distribution of income is in the United States.

*Hopefully readers will find my analysis here useful. But, even if not, I certainly hope you enjoy Ed Asner in his inimitable style explaining why we need to tax the rich.

**Now, it is true, as John Quiggin points out, the Gini coefficient is not a particularly good measure of inequality (since it is much more sensitive to what happens in the middle of the income distribution than to the tails), and the tax-and-redistribute proposal would in fact substantially improve the income of the poor even if it doesn’t alter the distribution of income according to the usual measures.

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