March 29, 2024

Today’s Economist: Bruce Bartlett: Wealth Inequality and Political Inequality

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.”

A crucial question in the debate over income and wealth inequality is whether its growth necessarily leads to a growth in the inequality of political power. If it does, then this is a powerful reason for the federal government to take active measures to reduce income and wealth inequality — even if it comes at an economic cost to the nation.

Today’s Economist

Perspectives from expert contributors.

Conservatives and libertarians generally do not believe that increased inequality is a political or economic problem. To a large extent, I think that is because they fear that acknowledging the problem would require the adoption of policies they find distasteful, immoral and economically counterproductive.

That is, income and wealth would have to be redistributed — taken via taxation from the wealthy and given to the poor. The higher taxes will reduce the incentive to work, save and invest among the wealthy, conservatives and libertarians believe, which will reduce economic growth and lead to the expatriation of the wealthy from the United States, while fostering a culture of dependency among the poor that will reduce their incentive to better themselves and escape poverty.

Insofar as the political dynamics are concerned, conservatives and libertarians are generally fearful of democracy. That is because, in principle, there is essentially no constraint on the ability of the majority to take from the minority and reward themselves in a pure democracy. The founding fathers very much shared this concern and intentionally enacted numerous restraints on the majority to protect the rights of the minority to their wealth. Among these are the federal system, with relatively strong states and a weak national legislature, as compared to parliamentary systems, and a Senate where small, sparsely populated states, per capita, have more influence than large, populous states; a written constitution with strong protection for property rights; and an Electoral College instead of election of the president by pure popular vote.

One reason that conservatives and libertarians obsess over the large percentage of the population that pays no federal income taxes, often put at 47 percent, is the political concern that the nation is very close to a tipping point where the have-nots can take from the haves almost at will.

The simple solution to this problem, to the extent there is one, would be to extend the tax net to some of those now living free of federal income taxation. But this is practically impossible because Republicans, who mainly complain about the large numbers of nontaxpayers, enacted most of the tax policies that removed them from the tax rolls. These include the earned income tax credit and the refundable child credit.

Secondly, almost all Republican legislators have signed a tax pledge promising never to raise taxes for any reason. Most Republicans are also ideologically opposed to a value-added tax, which would be the simplest way of getting everyone to pay some federal taxes to cover the government’s general operations. The payroll tax, which is more broadly based than the income tax, is earmarked to pay Social Security and Medicare benefits only.

Because the simple and obvious solution to their problem is off the table, conservatives and libertarians have concentrated on cutting benefits for the poor. They believe that programs such as unemployment compensation and food stamps subsidize laziness and undermine the work ethic. If such programs were cut, then those now benefiting would be forced into the labor force, where they would become taxpayers and cease being tempted by politicians promising them something for nothing.

The liberal view, by contrast, is that the poor are relatively powerless. They vote in lower percentages than the well-to-do and often suffer from policies to reduce their political influence, such as onerous voter registration requirements, demands for government identification at the polls and long waiting times to vote on Election Day. There is also evidence of growing pressure by employers to force their employees to vote against their own interest and for the employer’s.

Liberals believe our political system is generally more responsive to the interests of the wealthy. The poor, after all, are not major sources of campaign contributions.

But that is only part of the story. The well-to-do are far more likely to be engaged in the political process and to bring their concerns to bear on their elected representatives through direct contact.

Thus we have seen that while the recent budget sequestration has brought hardship to both the poor and the wealthy, Congress has taken no action to relieve the burden on the poor but acted with amazing speed to relieve a key concern of the wealthy — furloughs for Federal Aviation Administration personnel that created airline delays.

A new study by the political scientists Benjamin I. Page, Larry M. Bartels and Jason Seawright presents strong evidence that the wealthy are more aggressive and more successful than the poor at influencing the political system in their favor. This study is based on interviews with 83 wealthy people in Chicago.

The authors contrast the views of those in their survey with those of the general public based on national public opinion polls. They find that the wealthy are much more concerned than the general public about budget deficits, much more in favor of cutting social welfare programs, much less in favor of government jobs programs and much more opposed to government regulation, among other things.

Professors Page, Bartels and Seawright were unwilling to draw firm conclusions about whether the wealthy have disproportionate influence in American politics, owing to the small size of their survey sample. But it is at least obvious that the economic policy preferences of the wealthy strongly overlap with those of the Republican Party.

On the other hand, research by the political scientist Martin Gilens in his book “Affluence and Influence: Economic Inequality and Political Power in America” shows that the wealthy tend to be more liberal than the Republican Party on social issues. By and large, the wealthy are not religious, favor abortion rights and support gay rights.

The best hope for liberals in the future may be to emphasize social issues, which split the Republican Party between the interests of the wealthy and those of religious and social conservatives who dominate primary elections.

Article source: http://economix.blogs.nytimes.com/2013/04/30/wealth-inequality-and-political-inequality/?partner=rss&emc=rss

Today’s Economist: Bruce Bartlett: The True Burden of Government

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Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

Famously, Milton Friedman always said that the true burden of government is what it spends, not what it taxes. While correct up to a point, his statement has unfortunately led many conservatives to believe that the budget deficit is of no economic importance. That is to say, they believe there is nothing to be gained by reducing the deficit unless it results from lower spending, because that and that alone reduces the burden of government, and reducing the burden of government is the only thing that will raise growth.

Today’s Economist

Perspectives from expert contributors.

However, as I explained last week, there is a cost from deficits in the form of interest on the debt. If government revenues are too low to finance the level of spending that voters insist upon, spending automatically rises. Eventually, interest on the debt can only be paid with higher taxes, even if all spending except for interest is abolished.

Put another way, the amount of future spending cuts or tax increases necessary to stabilize government finances will always have to be larger when spending increases or tax cuts are deficit-financed. That is because interest increases the size of the future fiscal adjustment. Compounding means that the longer an adjustment is put off, the larger it must eventually be. And of course, debt default is simply a form of tax that falls disproportionately on bondholders; inflation is a tax paid by everyone.

Additionally, government borrowing has effects on the economy independent of spending in general. The economic impact of spending depends on what it is for and that impact may be positive or negative. Conservatives often imply that all spending reduces growth by pre-empting resources that the private sector could use better. But unless one believes that anarchy maximizes growth, that is nonsense.

Government borrowing necessarily takes money out of capital markets, crowding out private investors who would otherwise use those funds for business expansion, new plants and equipment or other business purposes. Such crowding out may be modest today, mainly because a slowdown in growth has sharply reduced the demand for capital. Should growth strengthen, federal borrowing could become a major constraint on investment.

Obviously, many forms of spending greatly increase growth. Military spending protects us from threats from abroad, the police and courts protect our lives and property, schools raise the quality of the labor force, and public works like roads are vital to commerce, to name just a few examples.

Moreover, conservatives tend to believe that to the extent that taxation imposes a burden on the economy, it is largely in its aggregate form. That is, the total amount of revenue collected constitutes the burden of taxation; therefore, all tax cuts are per se stimulative to growth.

To the extent that the tax structure imposes a burden, it is only in the form of its effects at the margin, on the last dollar earned, conservatives believe. They deny that tax expenditures, special provisions of the tax code that cause individuals and businesses to spend or invest in particular ways, diminish growth.

Conservatives may acknowledge that tax expenditures are inferior to rate reductions in stimulating growth, but in practice conservative groups like Americans for Tax Reform, the misnamed organization run by the Republican tax guru Grover Norquist, support every single new tax expenditure because they think all tax cuts are per se good and always better than an equivalent government spending program for the same purpose.

Such groups also oppose any elimination of tax expenditures as a tax increase that will impose an unconscionable burden on the economy and diminish political pressure to cut spending. But in the real world there is no meaningful economic difference between direct spending and spending through the tax code.

If spending diminishes growth it has to be because resources are misallocated. But tax expenditures also misallocate resources. The idea that there is a significant difference between a misallocation resulting from the receipt of a government check and one resulting from a special tax deal is nonsense.

Conservatives cannot acknowledge this because it would lead them to accept the fact that eliminating tax expenditures, even if not accompanied by offsetting tax cuts, might raise growth for the same reason that cutting spending raises growth in their economic model.

Senator Tom Coburn, Republican of Oklahoma, has been asserting for years that many tax expenditures are identical to spending in all but name and are nothing but giveaways with no economic benefit except to the recipients. On Dec. 13, he released a new list of egregious tax loopholes that should be abolished and raise $130 billion of additional revenue over the next decade.

His view has led to a war of words with Mr. Norquist for several years. Writing in The New York Times, Senator Coburn explained that the Norquist tax pledge, which opposes any tax increase for any reason, is ultimately counterproductive on Mr. Norquist’s own terms. The deficit, Senator Coburn says, is a type of tax increase on future generations. And by increasing the likelihood of a future debt crisis, the pledge virtually assures future explicit tax increases in the form of higher interest rates and debasement of the currency.

Conservatives believe that slashing entitlement programs like Medicare is the key to avoiding a future tax increase. But for those who will have to work longer before qualifying for Medicare or spend more out of pocket to compensate for cuts in medical benefits, these effects are little different to them than the equivalent tax increase. What really is the difference to them of paying $1,000 more a year because of Medicare cuts or $1,000 more in taxes?

In short, the black-or-white distinction between taxes and spending, which conservatives believe to their core, is much more complex when looking at specific policies. Tax expenditures can be de facto spending and benefit cuts may be de facto tax increases.

The goal of public policy should be to use the policy instrument best suited to the nature of a problem. A tax incentive may simply work better than the equivalent spending program or vice versa. There is no reason to think, as conservatives do, that a tax cut is always superior to direct spending or that spending constitutes an economic burden while tax expenditures are costless.

Article source: http://economix.blogs.nytimes.com/2012/12/18/the-true-burden-of-government/?partner=rss&emc=rss

Letters: Side Effects of Ever-Bigger Law Schools

Opinion »

The Thread: Scold Your Own

Conservatives turned to the founding fathers to urge Tea Party holdouts to take the long view on the debt crisis fight.

Article source: http://feeds.nytimes.com/click.phdo?i=812d469086b2cee04e4bfa15693036e8

Letters: Will the Rich Sacrifice? History Suggests Not

Opinion »

The Thread: Scold Your Own

Conservatives turned to the founding fathers to urge Tea Party holdouts to take the long view on the debt crisis fight.

Article source: http://feeds.nytimes.com/click.phdo?i=bee57574cf64768db8b9e0f9b77261e8