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Note: this is a cross-post from The Realignment Project. Follow us on Facebook!

In part 1, I discussed the emerging intellectual critical mass on inequality; in part 2, I discussed how our tax system can be made into a great engine of egalitarianism. Today I want to talk about the remaining major areas of public policy that can act against inequality - namely our post-tax transfer system and our pre-tax regulatory state.


As I mentioned in part 1, a good part of why the American tax system is less progressive than it could be is that the way we handle income transfers (which includes social insurance programs, social welfare programs, and tax credits) is quite regressive. While Social Security is mildly progressive when you combine a progressive benefit structure with a regressive taxation, there's also a massive "hidden welfare" state in the tax code that exists largely for the well-to-do. There also obvious holes in our social safety net that contribute to inequality.

This is not a matter of fiddling around the edges - according to the Fabian Society, if the U.S had a tax and transfer system equivalent to that of Denmark (and keep in mind that we have a more progressive tax system), inequality would be reduced by 50% overnight.

Reforming Tax Welfare: because many Americans earn too little income to benefit from itemizing their deductions (which includes both the poor and the working class), they lose out on valuable income tax deductions. Home owners can deduct both interest on their mortgages and their property taxes, and given that they can do this for two houses, this provides even more benefits to the wealthy than it does to the middle class with whom this benefit is associated. Local and state income taxes can be deducted, which further decreases the progressivity of the tax system. The child tax credit provides $1000 per child to families with as much as $130,000 in income (thus including up to the top 16th percentile), but the full benefit only accrues to those who owe more than $1000 in income taxes after the standard deduction. And the list goes on...

The result of these deductions is to greatly increase inequality, especially within income groups. As we can see from the chart, the top 25% of middle income taxpayers (earning between $35k-55k) pay at a higher effective rate than the median fourth-quintile tax payer (earning between $55-88k). Those in the top bracket may pay 27% of their income or .5% of their income in income taxes - which reduces the progressivity of the overall tax, given that they're supposed to be paying a marginal rate of 35%.

Changing some of the most worthy deductions (housing especially if a renter's credit is established, child credit, EITC) by merging them into a single and fully-refundable Universal Credit (as the Fabian Society recommends for the British tax system) would greatly even the playing field for people with modest incomes. Likewise, allowing people to declare credits against the combined value of their income and payroll tax burden would open these benefits up to the 66% of Americans who owe more in payroll than they do in income taxes. At the same time, capping these deductions and designing credits to slope progressively across the board would ensure that the wealthy are no longer able to add to their wealth through tax avoidance and evasion.

In this fashion, a Universal Credit could serve as the foundation of a genuine Guaranteed Annual Wage, which would decrease inequality both by lifting up the poor and by providing a cushion for those in danger of falling into poverty.


Similar to income tax deductions discussed above, many of the retirement vehicles that the U.S government subsidizes (including 401ks, IRAs, Roth IRAs, etc.) suffer from a major flaw when it comes to egalitarianism. First, they are really prone to upswings and downswings in the business cycle, which creates inequality across age cohorts. More significantly, due to stagnant wages, many Americans cannot afford to save (let alone increase their savings) without decreasing their living standards, thus losing out to their richer peers who can. Thus, the phenomenon of "under-saving" is not merely behavioral; there are real constraints to the ability to save.

Federal Annuities: instead of limiting our Federal subsidy of retirement accounts to matching contributions, we can offer a progressive Federal old-age annuity to workers who cannot afford the minimum contribution requirements of the retirement funds of the middle class.
Social Security: in addition to the changes to Social Security taxes described last week, changing the benefit formula to offset the penalty incurred by temporary, part-time, and low-wage workers in building up the necessary levels of contributions, and increasing the minimum benefit to above the poverty would greatly reduce inequality in old age.

Health Care:

As many people learned during the debate over the Affordable Care Act, public policy on health care creates inequality in that low-income workers are less likely to have health insurance (and therefore get tax-free status for their contributions and deductions for their payments). Shifting these provisions to a universal flat-rate health care credit, and allowing people to use that credit as premiums under Medicare/Medicaid would both greatly expand health care coverage, reduce medical inequality, and reduce medically-induced bankruptcies (which then creates downward inequality).

Pre-Tax Regulations:

Dealing with inequality before taxation is the least discussed method, in part because it lacks the simplicity of just taxing and spending the problem away, and in part because it might leave to government intervention in the economy. However, it's a nettle that has to be grasped. As I've discussed before, we are living in an economic order that stifles the economic progress of the majority, while greatly increasing the incomes of the wealthy. In such a system, the wealthy will use their capital to avoid, evade, lobby, and donate their tax burden away while tamping down on even the most blameless form of economic transfers. Without tackling the sources of inequality coming out of the labor market, all other policy will be fighting against a constant riptide.

Living Wage and Labor Market Policy: as I have argued before (see the link immediately above), one of the major sources of inequality at the bottom is a weak labor market that has led to wage stagnation and decline. Establishing a living wage should provide a backstop against wage stagnation-driven inequality and additional leverage to workers seeking a fairer share of their labor. At the same time, permanently lowering unemployment through Job Insurance and other forms of labor market policy both removes another source of inequality at the bottom and empowers workers to demand a more equitable distribution of wealth.

Workplace Regulations: over the last decade, the focus of the broader left when it comes to pre-tax inequality has tended to focus on passing some version of EFCA and thereby boost the union movement as a "countervailing force." This is quite sensible, since unions act to increase the wages of all workers (both union and non-union) and to organize politically to expand the "social wage." However, there's more that we can do to make workers feel protected enough to speak up for themselves, to finally end the state of affairs that the workplace is the least free place in America (outside of the prisons). Only when workers are free to express themselves can they begin to pressure their employers for higher wages or to join unions

Corporate Regulations: a final approach is to tackle corporate power directly, especially the ability of corporate boards to make decisions about the pay and benefits of both executives and line workers (and the division of revenues more generally) in secret and without accountability. Requiring a binding affirmative majority shareholder vote to approve executive compensation packages, and allowing shareholders to block the payment of golden parachutes to executives who fail to meet performance standards would make a major difference in slowing down runaway executive compensation; likewise, requiring all payments to executives to be reported as income paid to the executive and a cost born by the company would eliminate a major loophole by which executives escape taxation on their income.


In the end, all societies have as much inequality as they are willing to tolerate. Inequality is not necessary for prosperity, nor is reducing it particularly difficult - the question is one of political will.

Are we willing to deal with inequality in a serious way, in a way that might make some well-off people uncomfortable or might involve new ways of doing economic policy? That is the question before us.

Originally posted to Income Inequality Kos on Sat Apr 16, 2011 at 02:48 PM PDT.

Also republished by oo, A Perfect Conversation, and Community Spotlight.

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Comment Preferences

  •  Vikingq - just a question (5+ / 0-)

    What payments are made to executives that are not reported as income to both the public through the proxy tables and to the IRS on W2s?

    "let's talk about that"

    by VClib on Sat Apr 16, 2011 at 03:50:06 PM PDT

  •  Republished to (3+ / 0-)
    Recommended by:
    DvCM, corvaire, KelleyRN2

    A Perfect Conversation.

    I missed the first two parts in this series, but luckily this third part has links to both. The pre-tax regulation segment alone, presented in this diary, is worth more attention, I think. In all, there's a great deal of information to chew on.

    There can be no left-of-center if the left is in the center.
    Have you seen a pest, critter, or bug? You need KosBusters!

    by Gabriel D on Sat Apr 16, 2011 at 05:12:56 PM PDT

  •  Vikingkingq~ (3+ / 0-)
    Recommended by:
    corvaire, KelleyRN2, Gabriel D

    I'm appreciating these diaries even though they are truly over my head.  I can glean enough to 'get it' and speak less vaguely about tax matters - but, best of all, I have you as a resource to refer people to. Hotlist ~ voila'.
    Thank you!

    Too soon old, too late smart.....

    by DvCM on Sat Apr 16, 2011 at 06:14:41 PM PDT

  •  I think mcgovern had universal credit proposal (0+ / 0-)


    If you want a link, I'll look for a link. If you really want it. Just ask.

    by Inland on Sat Apr 16, 2011 at 08:30:09 PM PDT

  •  Good series (0+ / 0-)

    I'm actually writing a paper for school on how tax policy can be used to decrease income inequality (and have a section including ways that it is not helping) and the links you have provided in your diaries have helped me with my research.

    "Out, out, you demons of stupidity!" ~ Dogbert

    by husl piper 11 on Sat Apr 16, 2011 at 08:59:56 PM PDT

  •  FICA Financed the Bush Tax Cuts... (1+ / 0-)
    Recommended by:

    Which means that those of us who pay FICA from first to last dollar of income have been paying for years to "reduce" the deficit, since such revenues are added to the general revenue stream.  

    Middle and lower income FICA payments therefore have been used to subsidize the Bush Tax Cuts for the wealthy, which would have caused the deficit to rise by much more than it did without a SS surplus.

    "What's So Funny 'Bout Peace, Love and Understanding?" Nick Lowe

    by LHB on Sat Apr 16, 2011 at 09:57:03 PM PDT

  •  Higher wage floor solves SO many problems (0+ / 0-)

    How many of the whack-a-mole tussles with republicans over cutting this and cutting that could be solved just by raising the minimum wage so high that working people could actually afford a decent life? We wouldn't need all those government programs if people were paid enough to buy health insurance, buy childcare and early childhood education, buy drug treatment, buy mental health care, buy organically grown fresh vegetables, etc, etc, etc!

    Until the average middle class soccer mom or dad becomes unwilling to benefit from the work of miserable, impoverished wage slaves, whether here or in china, the problem of inequality will continue to grow.

    •  perfect recipe for offshoring our jobs (0+ / 0-)

      That would guarantee any job that is able to be done by foreign workers, would be.

      •  Well... (0+ / 0-)

        70% of the U.S workforce is in non-tradable sectors. So there's a limit to that argument.

        The living wage movement is directed at trying to set the wage floor above the poverty line. It's not the same as Jasmine's proposal, but I would argue that supplementing a ~$11/hour min wage with a GAW would accomplish the same thing without damaging competitiveness.

        •  either you cave in to offshoring, or you don't (0+ / 0-)

          Victor Laslo seems to believe that our current situation is not one in which any job that is able to be done by foreign workers, is or soon will be. I believe he is wrong about this. Already even your CAT scans are being read by radiologists in India. The outsourcing/illegal immigration problem will never be solved until a) the average wage for every job but CEO is lower in the United States than anywhere else in the world, or b) American consumers stop being willing to buy things and services  that are cheaper only because the workers who make/provide them are paid less. Until then, I sincerely believe that there is nothing at all we could do to make the outsourcing/illegal immigration problem worse, unless we actually abolished the INS and made it illegal for American corporations to employ US citizens. Face it, the trend is already catastrophic and shows no signs of even slowing down. Blaming this on American workers' wages being 'too high' is a republican meme, not a democratic one. Blaming it on evil corporations is a naive democratic meme. Blaming it on the short-sighted, self-destructive nature of OUR OWN purchasing decisions is the only way of looking at it that will ever lead us to an effective solution.

  •  Social Security and the poor ... (0+ / 0-) an activist for low income people, to me Title IV is about as regressive as it gets because of the significant amounts it takes out of the Social Security pot, which is funding the American Safe Families Act (AFSA).  Its caveats say that the more children taken from families, the more money will be allocated to the state doing it.  

    This is creating a heueueuge Adoption and Foster Care Industrial Complex, taking mostly low income children and then terminating the parent's rights and adopting these kid without any emphasis on family preservation.  the owrse part about it is the corruption of the DSHS system and family court, all desperate for money who are ignoring Constitutional rights and ramrodding these kids out of their family homes.  

    Meanwhile Welfare, which USED to be part of this Social Security funding and made "discretionary" by Welfare DEFormed is being denied to these families (most of them working McJobs forced on them in the first place by Workfare).  Then, Even though many studies show it works better to keep kids at home excuses of "maltreatment and neglect" and "imminent danger" (both never legally defined nor having to be proved) are used to take these kids because the parents cannot afford their own healthcare, childlcare, housing, food, or energy costs.  And because they also cannot afford legal help, they are assigned lawyers who are paid out of same AFSA funds as their legal "adversaires" and therefore losing their cases are in their best interests as well.  

    Here is the worse part of this: After collecting millions in AFSA funds, the Foster care and Adoption Industrial Complex goes in and snatches about 1/3 of the "discretionary" welfare funds for themselves as well, depleting the funds needed to help desperately poor families.  

    In other words because of funding, which would cost less than half as much, they would rather destroy an intact family, take their kids and sell them than help the family with desperately needed services.  

    Furthermore the corruption of Constitutional rights being routinely used in family court is setting "precedence" for higher courts.  No CPS worker, CASA, paid consultant, nor court official is ever held accountable even after being proved to have lied in court.

    This court precedence is why it is not a big deal now to snatch a citizen from the streets and accuse them of terrorism, then imprison them without proof or a trial because it is done every day with families in this nation in every state and why if someone wants your kids to make a profit, any class is in danger of it, because it is known it can cost hundreds of thousands of $$$$$ to defend one's self or be relegated to "public pretenders" or if you are a non-parental family member accused, you have no right to counsel and can simply be put on a public list for the rest of your life as a "child abuser" without so much as a court hearing.  

    There is more, much more about this, but suffice it to say snatching children or what is called "legal kidnapping" is in full force in this country and it is due to Social Security funding that mandates, "the more kids you take, the more money you will get".

    Cat in Seattle  

    First they ignore you, then they ridicule you, then they hurt you, then you win ~ Mahatma Gandhi

    by mntleo2 on Sun Apr 17, 2011 at 07:47:22 AM PDT

    •  I misplaced the family studies with one link ... (0+ / 0-) should have gone to the paragraph above it:

      In other words because of funding, which would cost less than half as much, they would rather destroy an intact family, take their kids and sell them than help the family with desperately needed services.

      First they ignore you, then they ridicule you, then they hurt you, then you win ~ Mahatma Gandhi

      by mntleo2 on Sun Apr 17, 2011 at 07:50:46 AM PDT

      [ Parent ]

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