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Entitlement, Not Tax Cuts, Widen the Wealth Gap
· Monday, November 28, 2011
What should be done about income inequality? That basic question underlies the arguments hashed out in the supercommittee and promises to be a central issue in the presidential campaign.
Supercommittee Democrats argue that income inequality has been increasing and can be at least partially reversed by higher tax rates on high earners. They refused to agree on any deal that didn't include such tax increases.
Supercommittee Republicans offered a plan to eliminate tax preferences and reduce tax rates, as in the 1986 bipartisan tax reform. They argued that high tax rates would squelch economic growth.
They didn't make the case that their proposals would also address income inequality. But House Budget Committee Chairman Paul Ryan, in a 17-page paper based largely on a Congressional Budget Office analysis of income trends between 1979 and 2007, has done so.
Ryan, a Republican from Wisconsin, makes the point that the government redistributes income not only through taxes but also through transfer payments, including Social Security, Medicare, food stamps and unemployment benefits. The CBO study helpfully measures income, adjusted for inflation, after taxes and after such transfer payments.
Many may find the results of the CBO study surprising. It turns out, Ryan reports, that federal income taxes (including the refundable Earned Income Tax Credit) actually decreased income inequality slightly between 1979 and 2007, while the federal payroll taxes that supposedly fund Social Security and Medicare slightly increased income inequality. That's despite the fact that income tax rates are lower than in 1979 and payroll taxes higher.
Perhaps even more surprising, federal transfer payments have done much more to increase income inequality than federal taxes. That's because, in Ryan's words, "the distribution of government transfers has moved away from households in the lower part of the income scale. For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers."
In effect, Social Security and Medicare have been transferring money from low-earning young people (who don't pay income but are hit by the payroll tax) to increasingly affluent old people.
The Democrats, perhaps following the polls and focus groups, have been protecting these entitlement programs that have done more to increase income inequality than the Reagan and Bush tax cuts put together.
Ryan makes three more points that may strike many as counterintuitive.
First, reductions in some transfer payments haven't hurt the living standards of most low-earners. The prime example is the welfare reform act of 1996, which reduced transfers to single mothers but induced many of them to find jobs that left them better off economically and, probably, psychologically.
Second, Americans aren't trapped in one segment of the income distribution. A Tax Journal analysis of individual income tax returns found that 58 percent of those in the lowest income quintile in 1996 had moved to a higher income segment by 2005. This comports with common experience. We move up and down the income scale in the course of a lifetime.
Finally, the inflation adjustment used in the CBO analysis was the Consumer Price Index. But that tends to overstate inflation (as any indexes tends to do, since it measures the cost of a static market basket of goods and services). A study by Chicago economist Christian Broda found that prices for goods purchased by low-earners have been rapidly decreasing, while prices for goods of high-earners have increased. Kids' school clothes may be cheaper at Walmart than they were years ago, while prices at Neiman Marcus keep increasing.
So if the question is how to compensate for increasing income inequality, higher tax rates on high-earners won't do much -- and could be counterproductive if they diminish economic growth.
A better way is suggested by the supercommittee Republicans: Limit future increases in transfer payments to affluent households, and cap deductions for home mortgage interest and state and local taxes, which are hugely lucrative for high-earners and worthless for low-earners who don't pay income tax.
These proposals won't reduce income inequality altogether. Much of the increased inequality comes from the huge increases for those in the top 1 percent of earners. But we wouldn't be better off if Steve Jobs had never existed.
Keeping entitlements as they are and raising tax rates on high-earners is a recipe for Europe-style stagnation. Ryan and the supercommittee Republicans point toward a better way.
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Kevin
"What should be done about income inequality?" The only thing the government should do about income inequality is ensure equal opportunity and not discriminate.
Other than that, its up to the individual. We're free to be lazy or free to work hard, take risks and climb up the income ladder.
Posted November 28, 2011 at 9:13:27 AM
Joshua Williams
What should be done about the title of this article? Subject-Verb agreement.
Posted November 28, 2011 at 9:21:56 AM
Jeremy
Of course, Democrats will look at these same numbers and say something like, "The answer is obvious. We need to increase transfer payments to the poor." That is, leave alone the bribes paid to the elderly and other relatively well-to-do (so Democrats can get their votes) and increase the bribes paid to the poor (so the Democrats can get their votes). Unfortunately, the political logic is perfectly sound.
Posted November 28, 2011 at 10:34:34 AM
JD
The fallacy of the comments concerning the tranfer payments by the young to the wealthy old and calling it an entitlement is that the old paid for the payments received over many many years. These old people were not supporting earlier recipients since the program was started during their full working years. The politicians transfered these payments to the general fund and spent it all. Now the old are said to be receiving funds transferred from the young as entitlement. The inferance is that they are getting welfare from the young. Nothing could be further from the truth. This part of the so-called political logic is not sound or accurate.
Posted November 28, 2011 at 11:42:23 AM
Durk
Social Security is already hyper-progressive.
A retiring low income earner will receive back everything that they have paid in within about five years, and then continue to receive payments.
A retired upper middle class worker may have to live into his eighties or even nineties to receive what he has paid in. Why? If you are upper middle class and in your fifties or older, typically only 15% of your "contributions" count towards your "account". Apparently, an effective tax rate of 85% isn't progressive enough. The push to reduce payments to higher income earners is more Progressive slavery.
Posted November 28, 2011 at 12:16:13 PM
AntonDrehling
This debate about income inequity isn't a debate about equality, liberty and the individual rights of a free people. This is clearly a debate not on the level of income equity but on the level of the transformation from free market capitalism to tryranical socialism.
Posted November 28, 2011 at 2:00:06 PM
Bud
There is lots of talk these days about the shame of income inequity. The progressives/socialists are saying that those who earn a good income should be willing to share with those who don't.
Well, since I believe in sharing I want to start another movement which I think is more realistic and fair. It is called WORK INEQUITY and it applies to those who do not work enough to pay for what they consume! These are the ones who can't seem to find and hold a job and live off the rest of us using the various state/federal government programs. Their laziness provides room for the illegals all over the country, taking the jobs that our own people can't seem to find and perform, many under the table where no income tax is collected. We should insist that ablebodied people get out of bed every morning and WORK for their living.
Posted November 28, 2011 at 2:21:39 PM
Garry G
JD:
I disagree. Old people on Social Security and Medicare certainly are receiving entitlements from the young. You admit yourself that the money old people paid for SS went into the general fund and has already been spent. The politicians already spent that money and now they are transferring money from young workers and giving it to old people today. It is inter-generational theft. And the fact that old people were lied to and told that they were paying into a trust fund doesn't make it any less so. The only way to stop the lies is to get rid of the programs. We either stop the programs or go bankrupt.
Posted November 28, 2011 at 8:31:42 PM
MMiles
Sorry, but the hard truth is that the vast majority of Social Security recipients who live more than 5 years after beginning to draw payments get far more out than they ever paid in. What your employer paid didn't come from you (though it might have cost you in terms of lower pay than you might otherwise have received, something politicians don't talk about). You can kid yourself that you "paid for" what you're getting out, but it just ain't so. You're on old-folks Welfare.
Posted November 28, 2011 at 11:58:03 PM
d.w.hudson
Dear tax-eating parasitic government employee, pay me back MY money that you have taken and forced my employer to take from me in the form of social security TAX, medicare TAX, and medicaid TAX and then leave me alone. In return, I'll actually pay my own doctor, take care of myself, and if there's anything left I'll give it to my family when I die. If I run out of MY money first, then I'll just make do or die. But you won't make that deal, will you? You can't stand it if you aren't jamming yourself into MY life and MY earnings and telling me it's for MY own good that you're giving MY earnings to yourself and others who haven't earned it.
Leave me alone.
Let me live my life in peace with the things I'VE earned.
Posted November 29, 2011 at 6:31:10 AM
Lynda
Why lump Social Security in with Medicare and Food Stamps?! It's NOT a "free" hand out! Social Security is paid in from your very first job and continues till you are no longer able to work! That's what is supposed to support the current S.S.recipients. Then in turn, the next generation of S.Security people. Maybe SOME seniors have become more affluent, but don't delude yourself into thinking there are no struggling seniors out there! THEY MAY HAVE STRUGGLED ALL THEIR LIVES TO MAKE ENDS MEET, AND NOW STRUGGLE EVEN MORE ON SO MUCH LESS NOW THAT THEY ARE UNABLE TO WORK, with inflation added in! Some people never have been in this position, and have no idea what that is like! Apparently you seem to be one of those. I hope not...
Posted November 29, 2011 at 5:13:55 PM
KYJeff
How about this. Let's stop this time consuming debate on income distribution. The facts about Social Security and the spending of SS funds are clear enough. I'm still trying to find "redistribution" in my copy of the Constitution.The parasitic misfits in the 'occupy' gang want this discussion as a means to promote socialism. 'Nuf said.
Posted November 30, 2011 at 8:11:02 AM
pete
Back in the days when I worked as a grocery clerk I resented most of the people paying for their groceries with food stamps. I knew many of the personally. The worked under the table, especially in construction, and made more than I, sometimes two to three times as much, per year. They paid no taxes, were given food stamps, "government cheese", their kids were fed school lunches - most of which they threw in the trash, they were covered under state health insurance, and while I was going to the local dental school for my cleanings they were getting free cleanings, extractions, and fillings.
With a little bit of luck and the Grace of God, one of these days we'll read of an 'expert' including the cost of all that as part of income in their analysis. I know I had to earn it before I could pay it.
Posted December 1, 2011 at 6:39:18 PM