What to Do About Inequality
That inequality is a major social problem was once a niche belief on the left. From time to time, a small cadre of anti-inequality intellectuals would rail about the false consciousness of the public.
Why, they would ask, is the American public so accepting, even unaware, of the spectacular takeoff in economic inequality? When would middle-class voters—inside of Kansas and out—finally open their eyes, acknowledge the problem, and stop backing the political party that bears so much responsibility for the creation of a new Gilded Age?
That was then. Now we live in a world in which a broad swath of journalists, intellectuals, and the informed public is openly worrying about economic inequality and debating what to do about it.
Judging by current legislative proposals and Democratic Party rhetoric, there is an emerging consensus that our main response to inequality should be to increase tax rates for the well off. There is much to be said for this tax-based redistributive agenda and good reason to pursue it. But we ought not stop there. If we’re serious about reducing inequality, a higher tax rate for the rich will not suffice. We need other inequality-reducing interventions. It would be a shame if Occupy Wall Street (OWS)—whose concerns extend well beyond tax policy—were reduced to a push for increasing the marginal tax rates for people earning more than a million dollars a year.
What’s wrong with relying exclusively on a “tax the 1 percent” agenda? The most obvious problem is that it is hard to sell in a tax-fearing country. It’s just not convincing to go on with that well-rehearsed mantra: if only voters were narrowly self-interested they would support raising rates on those in tax brackets higher than their own. Whatever our simple models may imply on this point, we know they’re wrong and that American conservatives are remarkably adept at discrediting pro-tax proposals as Eurosocialism.
It’s even more troubling that the tax-based redistributive agenda is founded on a misdiagnosis. The driving assumption seems to be that inequality is increasing mainly because of reduced levies on capital gains, the Bush tax cuts, and related changes in U.S. tax policy. If that assumption were correct, then it would make sense to limit ourselves to reversing those policies.
But the takeoff in inequality cannot be explained by tax policy alone. To the contrary, as economists Emmanuel Saez and Thomas Piketty have shown [see their response to Grusky], there has been a dramatic rise over the last 30 years in pre-tax income inequality. The share of pre-tax income flowing to the top 1 percent of households increased from less than 10 percent in 1975 to more than 20 percent now. This spectacular increase in market inequality is of course exacerbated by changes in after-market taxation. However, because the takeoff in inequality is mainly generated within the market, we should look to market institutions to understand its main causes.
As important as tax-based redistribution is, we therefore need to supplement it with policies that address market inequality. We would do well to look to OWS for inspiration here. Although OWS hardly sings with a single voice, one line in the polyphony implies an institutional critique of inequality and a market-based remedy for it. The institutional critique is not about the tax system but about the ways in which American labor and capital markets generate extreme pre-tax inequality. The core idea is that powerful players have built self-serving and inequality-generating institutions that are often codified in law and come to be represented—through an ingenious sleight of hand—as laissez-faire capitalism.