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OPINIONS

Op-Ed: Occupy the Future: Taxes and inequality

Classic political theory says that in countries with high inequality like the United States, the median voter will favor redistribution through progressive taxation. But in the past few decades, income inequality in the United States has soared even as our tax policy has become less progressive. Today, tax rates on the highest income earners are low by any standard; they have fallen dramatically since the 1970s, when they were upward of 70 percent, and our current rate of 35 percent ranks among the lowest of the advanced nations. Our fiscal policy is far less redistributive than at any other point in our history, and now, programs like Social Security and Medicare, the last vestiges of the postwar social contract, may indeed be the next casualties of the anti-tax, anti-government dogma currently dominating our fiscal debate.

 

The result has been that less redistribution has compounded structural trends — the runaway corporate profits and stagnant wages driving post-1970 inequality — to accelerate a widening gap. Economists from the right will argue that this doesn’t matter, that inequality is the price we pay for growth. Higher marginal tax rates on high-earners would reduce the incentive to invest and innovate, stifling the so-called “job creators.”

 

The reality is that taxes on the rich do not disincentivize any more than do taxes on other classes. Since GDP is equivalent to the sum of all wages in an economy, “the effect on everyone else’s income if a worker chooses to work one hour less is zero” regardless of whether the worker is a janitor or a hedge fund manager, as explained by Ney York Times columnist Paul Krugman last month. If anything, our economy, fueled largely by middle class consumer demand, requires a tax system where the rich shoulder a larger share of the burden. And given that all income is subject to diminishing returns, it seems that the fund manager should be more willing to part with a billionth dollar of income than a teacher earning a fraction of that.

 

But the case for a more progressive tax system goes beyond Rawlsian notion of how a fair society ought to look. As our elected representatives in Congress continue to clash over the budget, what’s at stake is not only a few million poorer Americans slipping below the poverty line because of hardline insistence on spending cuts (though this prospect is real, as many Americans depend on social programs up for cuts.) In fact, a spate of recent evidence from the IMF, as detailed in the Dec. 2010 release “Leveraging Inequality,” finds that periods of long-run inequality also increase the likelihood of financial and economic crisis. The income gap is filled by an unsustainable growth in credit, as households “resist the erosion of their relative income position by borrowing to maintain a higher standard of living.” In the past decade, this borrowing mainly took the form of subprime debt to poor and middle class households.

 

In the face of political pressure for redistribution, politicians were either unable to find the political will to raise taxes or were outright against it. Clinton’s tax rates, now an upper limit, are not particularly high compared to Europe, and the Bush tax cuts were a boon to the rich. Instead of reinvesting in society, they slashed taxes and pumped cheap credit into the system. Institutions like Fannie and Freddie, part of Bush’s “home ownership society,” were vehicles for financing the debts of the poor and middle classes.

 

While interning in DC last spring, I was able to see Raghuram Rajan, the former IMF chief, present this view of the global financial crisis. In his talk, he made a surprising claim: that cuts in funding of early childhood education had played a role in causing the Great Recession. Cutting these programs, he argued, represented the broader attack on the social safety net that has compounded rising structural inequality in the past few decades, contributing to the broad demand for easy credit. The impact of these cuts was something I saw among the many public school students I had tutored from Harlem to East Palo Alto, whose parents might have been in debt.

 

No real redistribution ever happened. Meanwhile, the recklessness of the financial sector and deregulation set the stage for the crash. The credit bubble grew, and then in 2008 it burst, leaving most Americans worse off and the social safety net even weaker. Of course, it’s only one of the lessons in our tale of economic ruin, but it’s an important one: that inequality puts us all at risk. If progressive fiscal policy can address this imbalance through the redistribution of income, then it can make our economy not only fairer, but also stronger.

 

Jonah Rexer ‘12