The U.S. economy is projected to continue its half-century trend of growth in income and wealth, contradicting the common narrative that we as nation are “broke.” According to Let’s Face It—We’re Far from Broke: America’s Real Spending Problem and How to Fix It, a new report from EPI Director of Budget and Tax Policy Thomas L. Hungerford, the real fiscal challenges facing the United States are reduced spending on public investments and the increasing concentration of income and wealth at the top of the income distribution. Hungerford proposes a strategy for increasing tax revenues and redistributing income that includes increasing both public investment spending and taxes on capital income.
“The United States has a spending problem. But we’re not spending too much—rather, we aren’t spending enough on investments in America’s future,” said Hungerford. “Public investments in roads, education, and basic research have been major contributors to the growth in per capita income and wealth over the past 50 years. However, these economy-growing investments have fallen dramatically relative to national income.”
Overall, the nation is considerably richer today than it was 50 years ago, and significant growth in income and wealth is expected to continue for the foreseeable future. Between 1960 and 2013, per capita real income has steadily risen, almost tripling from $10,850 in 1960 to over $31,000 by 2013. However, the distribution of income has become more unequal, with the richest 1 percent receiving a growing share of income and owning a growing share of wealth. Between 1989 and 2013 the income share of the bottom 80 percent of Americans fell from 44 percent to just 40 percent. Meanwhile, the share of income going to the richest 1 percent of Americans increased from 16.6 to 19.6 percent over the same period.
At the same time, public investment in infrastructure, education, and R&D has fallen relative to GDP, undercutting American economic growth and America’s place in the world economy. In the past 50 years, federal public spending was at its highest between 1965 and 1981, when it averaged 2.2 percent of GDP. After 1986, it averaged 1.5 percent of GDP. To return public investment spending as a percent of GDP to its 1980 level in 2013 would have required an additional $150 billion—an amount roughly equal to the capital gains and dividends tax benefits received by the richest 5 percent of Americans that year.
“The United States is far from broke. Many Americans can afford to pay higher taxes,” said Hungerford. “Tax policy changes can address the problem of rising income and wealth inequality. By increasing public investment through increased tax revenues, we can further reduce income inequality by creating more higher-paying jobs and boosting productivity.”
Unlike wage, labor, and consumption taxes, taxing capital income would provide a growing tax base and would have distributional consequences that would help make the tax system more progressive. Capital’s share of income has been rising over the past four decades. It currently stands at 40 percent of total income and is projected to continue to increase in the future, providing a growing tax base. The great majority of this capital is owned by high-income individuals and most capital income is received by high-income individuals. While increasing taxes on wages or consumption would shift the tax burden onto lower-income taxpayers, increasing taxes on capital income would simply reduce the after-tax income of the richest 1 percent and distribute income more evenly.