Progress on inequality?


Intense as it is, the current debate over rising income inequality is hardly new. It represents the resumption of a discussion that was gathering momentum just before the Great Recession — and then got sidetracked amid the urgent business of dealing with that crisis. Our contribution to that interrupted argument was a series of 10 editorials devoted to inequality over the course of 2006, the last full pre-recession year. To revisit those pieces now is to experience a reality check on the progress that has, and has not, been made since. The good news is that there’s more good news than one might expect.

As we saw the problem then — and still see it now — some of the factors that have led to increasing income inequality are more amenable to policy solutions than others. There isn’t much government can do about the sweeping forces of technology and globalization, and some perennial recommendations — such as limiting free trade — would do more harm than good. Whatever else government does, it must preserve the engine of capitalist growth, without which there would be fewer resources to distribute, equitably or otherwise. On that score, what’s most encouraging is what the United States and, indeed, most of the world, have not done; in particular, they’ve weathered the Great Recession without a significant reversion to such failed strategies as trade protectionism or limitations on capital mobility.

In addition to avoiding making things worse, the country has adopted, at least in part, several of the policy improvements we thought made sense eight years ago. Most prominent among these was President Obama’s health care reform, which, for all its problems, promises to ease the health care cost squeeze on middle- and lower-income Americans. In addition, as of Jan. 1, 2013, the top marginal tax rate was raised nearly five percentage points, from 35 percent to 39.6 percent for individual earnings above $400,000 and household earnings above $450,000. This restores some progressiveness to the revenue system that was undercut by the Bush tax cuts, without significantly reducing high-earners’ incentives to work and produce.

Finally, both the federal government and the states are re-emphasizing the importance of early education; though President Obama’s call for universal preschool remains unfunded, the newly unveiled 2014 appropriations bill boosts spending on Head Start and authorizes a new $250 million competitive grant program for states to develop or expand high-quality preschool programs for 4-year-olds from poor families.

Of course, it is too early to measure the impact of these recent changes. And there’s at least one big piece of unfinished business: tax reform. As we argued in 2006, multiple deductions, loopholes and credits not only make the code and the economy less efficient; they also disproportionately favor upper-income Americans. Taken together, the 10 largest breaks — including the mortgage-interest deduction, the preferential rate for capital gains, the exclusion for employer-paid health insurance and the deduction for state and local taxes — cost $900 billion per year.

More than half of the benefits flow to the top 20 percent of households, according to the Congressional Budget Office. A fairer code is an indispensable step to a more equal America.

 

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