Friday, September 08, 2006

A Kept Promise

In 2000, candidate George W. Bush said:

On principle no one in America should have to pay more than a third of their income to the federal government.
Today, in Paul Krugman's NY Times column, I learn:

the effective federal tax rate on the richest 0.01 percent has fallen from about 60 percent in 1980 to about 34 percent today.
Because this is the group with the highest average tax rate, I guess we should conclude that President Bush kept his promise.

Of course, that wasn't Paul's point. Instead, Paul is continuing his theme that widening income inequality is a big problem and the result of the economic policies put in place by the rabidly conservative Reagan, Bush, and Bush and the annoyingly moderate Clinton.

Paul is correct that income inequality has risen substantially since 1980. Where Paul and I part course is on the question of why. Paul seems to think that rising inequality is policy-driven, but I cannot see what policies could plausibly have such a large effect. The biggest policy aimed at income distribution is tax policy. One could argue, "We cut taxes on the rich, and their pre-tax income went up in response." But I don't think that supply-side argument is what Paul has in mind.

Instead, Paul wants us to focus on unionization, minimum-wage laws, and regulation of CEO pay. But the decline in unionization can explain only a fraction of rising inequality, and in any event the government is not responsible for unions' decline. Meanwhile, minimum-wage laws apply to a only a few percent of the population, and are not well targeted as anti-poverty measures. CEO pay has risen substantially over time, but if anything was depressing it in 1980, it was not stricter regulation during the Carter Administration but rather the moribund economy. To me, Paul seems to be grasping at straws.

David Brooks channeling Larry Katz seems more on target when he says that rising inequality is mostly exogenous, rather than driven by government policy. About 10 years ago, left-leaning economists Robert Frank and Phillip Cook wrote a book called The Winner-Take-All Society, which said that changes in technology were making the economics of superstars increasingly relevant in the modern economy. That is probably closer to the truth than attributing some magical influence over the income distribution to the the man in the White House.

This analysis, however, does not tell you what to do now. Even if rising inequality is exogenous, the government could still respond to it by making the tax code more progressive. That is a coherent policy viewpoint, driven as much by political philosophy as economics, about which reasonable people can disagree. I am the first to admit that the study of economics by itself does not tell you how to balance efficiency vs equality. And it certainly does not tell you whether it is more noble to be an egalitarian or a libertarian.

In the end, the coherent view from the left comes down to rejecting the principle that "no one in America should have to pay more than a third of their income to the federal government." Maybe, as we look ahead to 2008, we should ask the question of all presidential candidates: What is the maximum federal tax any American should have to pay as a percentage of income? And then we can hold them to their promises.

Update: For a good example of the coherent view from the left, see Jason Furman.