How tax policy can expand opportunities for everyone, not just the few
Elected officials love to 聽talk about expanding opportunity in America, but few do anything about it. 聽And in a I found that spending for those federal programs that do aim to promote opportunity for all, such as work incentives and support for education, are on a path to shrink as a聽 share of聽 government resources.
This isn鈥檛 about the size of 聽government. Total government spending and tax subsidies are on track 聽to grow by almost $15,000 per household in ten years. It is rather, about how government allocates those dollars. Government programs other than public goods like defense come in two general forms:聽 In one bucket are those that promote opportunity by expanding 聽earnings and wealth, as well human and social capital. In the other, income maintenance programs attempt to help working age people achieve a minimum level of current consumption or help sustain the pre-retirement consumption levels of older adults. Thus, wage subsidies differ from welfare, and spending more money on education is not the same as providing additional years of retirement support.
It鈥檚 not that we don鈥檛 spend on opportunity-enhancing programs. About $1.3 trillion, equal to 7 percent of GDP or about one-quarter of total expenditures and tax subsidies combined, fall into this category. 聽This may sound impressive, but nearly 80 percent of 2016鈥檚 expenditures on opportunity are 聽tax expenditures. While some, such as the earned income tax credit (EITC), help 聽low-income workers, most tax subsidies largely .
By largely excluding those with low- to middle-incomes, tax subsidies for activities such as paying mortgage interest or saving for retirement fail to promote opportunity for all. Worse, 聽many fail to 聽promote very much opportunity for anyone. For instance, as far back as 1984, my TPC colleague Harvey Galper and I found that did little to 聽encourage 聽new saving. In 2012, Raj Chetty found that . 聽So while these programs might favor opportunity in some broad sense, they fail to promote opportunity for all.
Looking ahead, support for low- and moderate-income households, such as 聽the EITC, is on track 聽聽to decline 聽as a share of the budget while the non-inclusive programs such as housing and retirement 聽tax subsidies are expected 聽to grow. This is likely to happen under almost any set of assumptions, as almost all growth goes toward areas that few would classify as promoting opportunity for all, especially at the margin.
When one looks at growing inequality in earnings and wealth, it鈥檚 wrong to think this is only an issue of the 鈥渢op 1 percent.鈥澛� The allocation of government tax subsidies and direct spending also affects inequality over time, in no small part by the efficiency with which it promotes opportunity.
Government could fix this tax part of this problem by redesigning subsidies for housing and retirement to make them both more inclusive and more successful at their ostensible goal of expanding 聽homeownership and retirement saving wealth in the economy as a whole.
Homeownership subsidies could be reduced for second loans that mainly finance current consumption, second homes, or the ever-better housing that each generation pursues. At the same time, could be extended throughout the population, thus making the system far more inclusive.
Similarly, there are to to low- and moderate-income households, including a larger retirement-oriented savers credit and tighter restrictions on employer-sponsored plans that fail to extend benefits to most employees.
Economists on the left, right, and everywhere between generally support these reforms. Yet, lawmakers rarely act. By recapturing control of our fiscal future, and being willing to remake fiscal policy to focus on promoting opportunity for all, lawmakers could turn that goal from mere words to reality.聽
This article first appeared at .
