The Congressional Budget Office recently released a comprehensive report on income distribution and inequality trends of the last three decades. The report was widely viewed as an affirmation that the Occupy Wall Street movement’s concern with the distribution of economic rewards is well-founded.
Strikingly, House Budget Committee Chairman Paul Ryan (R-Wisc.) interpreted the report as an affirmation that his budget policy wish list is a panacea for the societal challenges of income inequality and economic mobility. The House Budget Committee Majority Staff’s 17-page rebuttal dodges the broad takeaway of CBO’s report by distinguishing between economic mobility and absolute well-being versus relative inequality, but Ryan’s own budget proposals belie this distinction.
As Ezra Klein points out, Ryan’s report presents a false dichotomy between closing the income gap (i.e., redistribution through a progressive tax) and growing the economic pie (i.e., regressive tax cuts for upper-income households). Implied is that redistributive policies increasing taxes on upper-income households would sharply reduce economic activity, making all households absolutely worse off. But this premise is contradicted by recent experience: President Bush cut taxes for upper-income households and we got the worst economic expansion since World War II, in which the ‘economic pie’ grew a meager 2.6 percent annually (and 65 percent of national income gains went to the highest-income 1 percent of households). The failure of the supply side experiment is unsurprising given ample evidence in the economics literature that the elasticity of taxable income is relatively low, changes in the top marginal tax rate have little impact on productive investment, and marginal tax rates are well below optimal rates.
Yet there is a more fundamental problem with Ryan’s analysis. Ryan is for redistribution, but the kind of redistribution that shifts the burden of taxation from upper-income households to the middle class. Just look at the Ryan Roadmap, his 2010 budget that served as a blueprint for the House Republican 2012 budget. The figure below depicts how the Roadmap would change shares of federal taxes paid and average federal tax rates paid by cash income levels, relative to current policy (from this Tax Policy Center table). Households with income above $1 million would see their average tax rate plummet from 29 percent to 13 percent, lowering their share of federal taxes paid by 10 percentage points. On average, households earning between $20,000 and $200,000 would see their taxes rise, subsidizing the upper-income tax cut. More than two-thirds of households would see a tax increase.
Click to enlarge
This redistribution will not close the income gap or foster economic mobility; this will merely confer a tax cut of $500,000 to households earning over $1 million annually. And for the reasons noted above, these tax changes are unlikely to spur long-term growth (any more than the public investments that Ryan’s budget would instead cut).
Finally, Ryan’s rhetorical support for economic mobility is contradicted by his oppositions to the very policies that promote mobility. Education and training provide a means by which low-income Americans can climb the socioeconomic ladder, and the social safety net helps that climb by lowering its risk. Yet Ryan supports massive cuts to these government functions and programs, such as Pell Grants helping low-income students pay for college.
Ryan’s acknowledgment that income inequality is a problem is certainly appreciated, but one wonders if the staffers who wrote this rebuttal are actually familiar with his policy positions.