Republican tax plans will make inequality worse
It鈥檚 one thing for the political class not to deal with the real problems we face; it鈥檚 quite another for them to make them worse
Republican presidential candidates Herman Cain, Mitt Romney, and Rick Perry pose for a photo before a Republican presidential debate in Las Vegas. Bernstein argues that Republican tax plans, like Cain's 9-9-9 plan and Perry's flat tax, would worsen economic inequality in the US.
Isaac Brekken/AP
One reason why all these Republican tax plans seem so dissonant is that they exacerbate the inequality trends generated by the increased concentration of market incomes鈥攊.e., incomes from all market sources, before any taxes or transfer programs (like Social Security benefits, welfare, or unemployment insurance) kick in.
Think of the income distribution in two parts. The first is the primary distribution of market outcomes, before any taxes or transfers take place. The secondary is the distribution of household income after taxes have been collected and transfers handed out.
Nobody argues that the tax system should completely offset the dispersion of market outcomes, and many would probably argue that it鈥檚 not the purview of the tax code to redistribute much at all. But neither would most people argue that the tax code should make the post-tax distribution more unequal.
Yet, that鈥檚 precisely what the Cain and Perry tax plans would do. Cain鈥檚 plan is particularly in this regard. Perry鈥檚 plan wouldn鈥檛 have much on the poor and middle class, though it would cut taxes for the wealthy considerably.
I understand that many conservatives are less concerned than, say, I am, about the growth of unequal economic outcomes鈥he figure below shows the increase in after-tax income by income group from a rich new by CBO. But what is the rationale for making it worse?
In fact, the CBO study finds that while the level of inequality is always lower after taxes and transfers, income dispersion has increased more in the so-called 鈥渟econdary distribution of income鈥濃�攁fter taxes and transfers鈥攖han in the primary distribution (market outcomes):
鈥淐BO estimates that the dispersion of market income grew by about one-quarter between 1979 and 2007, while the dispersion of after-tax income grew by about one-third.鈥�
This suggests that while the primary distribution is generating more inequality, taxes and transfers, while still progressive, are doing less to offset it: 鈥淭he equalizing effect of transfers and taxes on household income was smaller in 2007 than it had been in 1979.鈥�
The R鈥檚 tax plans鈥攁nd I鈥檇 strongly include the Ryan budget in this analysis, as it reduces transfers for the poor and cuts taxes for the wealthy鈥搘ould exacerbate this problem by making the current tax and transfer system a lot less progressive.
I guess I know the answer to the question I posed above (why go here?), or at least I know the 鈥渂enign鈥� answer: cutting taxes on the wealthy will unleash waves of growth that will lift the rest. But dress it up anyway you like鈥搕hat鈥檚 just trickle down鈥nd trickle down has a terrible track record.
You cut wealthy people鈥檚 taxes, you make them more wealthy, full stop. Mind you, I鈥檓 not saying that鈥檚 a bad thing鈥擨鈥檓 just saying that rich people not having enough riches is not this country鈥檚 problem right now.
It鈥檚 one thing for the political class not to deal with the real problems we face; it鈥檚 quite another for them to make them worse.