Apparently, Maine is going to start limiting the financial assets of welfare recipients, effectively discouraging them from saving money.
The state will place a $5,000 cap on the savings and other assets of residents enrolled in the Supplement Nutrition Assistance Program (SNAP). Those whose bank accounts, secondary vehicles and homes, and other assets considered non-essential by the government, exceed the limit will no longer be eligible to participate in the food stamp program. An individual’s primary home and vehicle won’t count toward the limit.
The thinking, according to the Gov. Paul LePage’s office, is simple: People shouldn’t be allowed to take money from the government if they don’t need to. “Most Mainers would agree that before someone receives taxpayer-funded welfare benefits, they should sell non-essential assets and use their savings,” LePage said in a written statement.
So, we now live in a country that is hellbent on surveilling and limiting the financial resources of poor people—but never asks the question of how much savings and other assets (from stocks to art) rich people have when it comes to paying taxes.
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.
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.
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.
A week or so ago, I described the Republican campaign for president as a one-trick pony. It’s only about tax cuts for the wealthy, and let the revenue chips fall where they may.
Apparently, Bobby Jindal has jumped on that same pony with only one discernible feature.
In a sprawling, largely detail-free plan released Wednesday, Jindal tried his hand at the tax-cut buzz saw. On a static basis, the Tax Foundation estimates, Jindal’s proposal would cut revenue by $11.3 trillion over the next decade.
That’s in the same ballpark as Trump. Yet rather than denying or trying to draw attention away from the gigantic hole he intends to blow in the budget (as Trump and Bush, respectively, have done), Jindal touts it with pride.
Jindal’s plan is also, impressively, even more regressive than Trump’s. While Trump would raise the after-tax incomes of the top 1 percent by a mere fifth (21.6 percent), Jindal would increase their incomes by a full quarter (25 percent).
Then, in addition to lowering taxes on the rich, Jindal — but not Trump — would raise taxes on the poor.
Yes, you read that right. Jindal wants to engineer a reverse Robin Hood, taking money from the poor to give to the rich.
There are lots of different ways of dealing with inequality—specifically, the growing gap between productivity and wages.
One way is to define it away. That’s what the Peterson Institute’s Robert Z. Lawrence attempts to do—first by including the wages of all workers, then by adding in nonwage compensation and using a different measure of prices, and finally by focusing on net output.
Voilà, the gap all but disappears (at least until 2000)!
Or you can argue, as chairman emeritus of Young & Rubicam’s Peter Georgescu does, that the gap is real and something needs to be done about it.
If inequality is not addressed, the income gap will most likely be resolved in one of two ways: by major social unrest or through oppressive taxes, such as the 80 percent tax rate on income over $500,000 suggested by Thomas Piketty, the French economist and author of the best-selling book “Capital in the Twenty-First Century.”
We are creating a caste system from which it’s almost impossible to escape, except for the few with exceptional brains, athletic skills or luck. That’s why I’m scared. We risk losing the capitalist engine that brought us great economic success and our way of life.
Clearly, both Lawrence and Georgescu are afraid of the growing gap between a tiny minority at the top and everyone else. They are worried that it undermines capitalism’s legitimacy, especially the idea of “just deserts.”
But they have two very different ways of responding: one by defining the problem away, the other by trying to convince capitalists to pay workers more and thus to narrow the gap.
And if neither strategy works? Well, as the Campaign for $15 has shown, workers will just to have to take things into their own hands. That’s something neither Lawrence nor Georgescu wants.