Progressive Taxation and Spending Must Both Be Part of the Fight Against Inequality

Economic inequality has emerged over the last few years as a matter of serious concern in the United States and elsewhere. Prior to the emergence of the so-called Occupy movement, American policymakers—and to a surprising degree, economists and other academics—considered inequality to be, at best, a secondary matter of concern, far behind the more central goal of making the economy grow.

It has become clear over the last generation, however, that economic growth does not guarantee improvements in the living standards of the bulk of our citizens. There is now overwhelming evidence that the economy’s fruits are being enjoyed ever more by a tiny slice at the top of the income spectrum. Meanwhile, even people who never thought of themselves as poor now discover that they are precariously close to facing economic devastation.

With inequality now very much a part of the U.S. political conversation, a new set of issues has emerged. Among the most important of these is the question of what, exactly, it is about inequality that we dislike. Is the problem that there are now too many poor people? That there are too many people who are on the precipice of becoming poor? That the middle class is shrinking, and that the incomes of the middle class are stagnating? That the rich are too influential, too ostentatious, or too uncaring?

My view continues to be that our policies should be changed in a way that will narrow the disparities between those at the top and the bottom, by pushing down at the top, and by pulling up from the bottom. But the alternative argument, that we should focus our efforts only on the bottom (and perhaps the middle), can be rejected only if we first fully comprehend it, which will allow us to understand where it falls short.

Bottom Up or Top Down, or Both?

Are we concerned only about poverty, or is there something wrong with inequality per se? That is, are we concerned only about pulling up those at the bottom, or also about pulling those at the top back toward the rest of the pack? If we are concerned about the plight of the poor, after all, then we might not really care either way about the non-poor, or about the range of incomes and wealth for those who are not struggling merely to survive.

At times, this distinction is used merely as a distraction by those who care about neither poverty nor inequality. In response to a proposal to increase taxes on rich people, for example, conservatives (Republicans as well as some Democrats) will say, “Well, we should really be thinking about how to help the poor, not to gratuitously harm the rich.” Of course, when the time comes to consider policies to help the poor, these same people turn out to be utterly unconcerned with the plight of the poor or with those who are on the brink of economic disaster.

Faced with policies that would really help the economically vulnerable (such as an increase in the minimum wage, or extensions of unemployment benefits for those suffering from the weak economy), all we then hear is how inefficient it would be to help such people, and that we should merely allow a rising tide to lift all boats. But it is precisely because such trickle-down bromides have been proven so disastrously wrong that we are finally having this discussion about poverty and inequality at all.

Although there are people who use the “What do we really care about, poverty or inequality?” question as a distraction, who strategically set up a moving target to prevent any action ever from being taken, there are also people who argue in good faith that the object of our concern and policy efforts should be exclusively focused on those toward the bottom of the economic scale, and that the fortunate few at the top should simply not be part of the discussion.

The Good Faith Version of the “Let’s Focus Only on Poverty, and Ignore the Rich” Argument

This discussion has a long history, but a particularly clear recent version of the argument that “soaking the rich” is not a legitimate policy goal was provided earlier this month on the op-ed page of The New York Times. Edward Kleinbard, a law professor at the University of Southern California, explicitly argued that we should stop trying to increase taxes on the rich—not because he is unconcerned with the non-rich, but because he believes that there are better ways to help the non-rich through government spending, rather than by taxing wealthy people.

It is important to understand that Professor Kleinbard is absolutely not someone whom we should suspect of being an apologist for “the 1%.” Although he is a former corporate lawyer, he now uses his knowledge and experience in his academic career to focus on ways to prevent the rich from gaming the political system (and especially the tax system). If there is anyone who is above suspicion for being engaged in the kind of shell game that I described above, Professor Kleinbard is that person. Although I ultimately disagree with his conclusion, his argument deserves careful consideration.

Professor Kleinbard’s op-ed might be read to suggest only that there is no political will for increasing taxes on the wealthy. Thus, he might merely be arguing that focusing our limited political capital on an unwinnable fight is simply bad strategy. But even that argument ultimately assumes that the benefits of increasing taxes on the rich would simply not be sufficiently important to justify spending time trying to win that battle. Ultimately, therefore, this argument requires confronting the question of whether there is some positive policy outcome that could be achieved by increasing taxes on the rich, and whether that outcome is more important than what could be achieved by ignoring the rich and fighting directly for increased spending on everyone else.

Professor Kleinbard’s argument is quite innovative and, as far as it goes, largely correct. He notes that “government spending invariably is very progressive,” not just because of the programs that are obviously directed at helping the least well-off among us (Food Stamps, Medicaid, and other programs that the Republican Party has so aggressively vilified), but because even spending on things like highways provides benefits that are a larger percentage of the incomes of the middle class and poor than of the rich.

In short, then, when Professor Kleinbard says that progressives are wrong, he is faulting them only for focusing on the progressivity of the tax system alone, whereas “progressive fiscal outcomes do not require particularly progressive tax systems — just big ones, to support substantial government investment and insurance programs.” That is, he argues that what we really need is Big Government.

As shocking, even radical, as that argument might sound, Professor Kleinbard is absolutely right. What makes a modern economy good for its people is its ability to provide stable jobs at decent pay, access to health care that prevents “medical bankruptcies” and other middle- and lower-class tragedies, quality universal primary and secondary education, access to higher education, and secure retirements. Experience has shown that all of these can be provided much more effectively—and, as we can especially see in our bloated and costly health care system, much more inexpensively—by the federal government.

The Tax Side of the Argument

As far as it goes, then, this argument is quite convincing. There is a strong case to be made that the federal government’s role in the economy is too small, and that Ronald Reagan’s famous line that “government is not the solution to the problem, government is the problem” is completely wrong.

All that tells us, however, is that decisions about government spending are important, not that decisions about taxes are unimportant, or even that they are sufficiently less important that we can strategically ignore them. We need to think carefully about how decisions about taxes affect the overall story, too.

If the argument is that we cannot tax the rich any further than we already do, but we need to spend much more on (inherently progressive) government programs, then the question is where the money will come from. Professor Kleinbard does not argue for an increase in the overall level of government debt, or permanently higher deficits—even though there are creditable arguments to that effect. Instead, he presumes that the taxes will come from the non-rich.

At first blush, it might sound silly to argue in favor of taxing the non-rich, only to turn around and spend that money to help the non-rich, but it is actually possible to do exactly that in a way that has a net positive effect on the well being of everyone. Because so many of the things that make people better off can best be provided by pooling resources—retirement, education, infrastructure, and so on—a progressive spending program can help everyone and enhance overall progressivity, even if it is funded non-progressively. Many highly egalitarian European countries levy mass taxes on everyone to fund large, effective government sectors.

But it would be even more progressive to fund such socially beneficial government spending through taxes on the rich, which brings us back to the question of why we have to unilaterally disarm on the question of progressive taxation.

Why Tax the Rich, When We Do Not Have To?

Professor Kleinbard argues that “the American tax system already is the most progressive in the developed world,” which strikes me (and others) as clearly wrong. In part, that difference of opinion is based on statistical subtleties that are not worth airing here. The more important point, however, is that even if it were true that the U.S. tax system is currently more progressive than most other countries’, that does not tell us anything about what is possible, that is, what the limits are in terms of progressive taxation.

[Update: After publishing this column, I learned that Professor Kleinbard’s argument in his op-ed was truncated due to space limitations, which led to a loss of nuance in his discussion of how to measure the overall progressivity of a system of spending and taxing. Interested readers might want to look at Professor Kleinbard’s well-reviewed new book, We Are Better Than This (Oxford University Press), which develops these and related arguments at length.]

After all, compared to other countries, America also has much more wealth owned by a tiny fraction of our population, because even a progressive tax system can leave the wealthy with the lion’s share of after-tax income. So, even if European countries collect less of their tax revenues from rich people than we do, that says nothing at all about the overall amount of revenue that could be collected from progressive taxes. It also means that we could both collect more taxes from rich people and leave the wealthy in the U.S. with more after-tax wealth than their European counterparts (if we feel that doing so is necessary as a political matter).

In other words, saying that “our taxes are already relatively progressive” is not the same as saying that “our tax system cannot collect more money from the higher end of the spectrum.”

Perhaps, however, the wealthy are so well organized politically that they will stymie any effort to “soak the rich,” so that we would be better off spending our political resources on progressive spending. But the one thing that has changed most about the U.S. political debate over the past few years is that the politicians who are doing the bidding of the wealthy are now just as focused on fighting government spending as they are on resisting tax increases.

The Tea Party movement, after all, has given us needed clarity, exposing the fact that the conservative agenda is not an effort to improve the balance of policies in some technocratic cost/benefit fashion. It is, instead, an existential battle against the notion of government itself. For people with progressive goals to give up on progressive taxation, based on the belief that we will have an easier time politically if we only push a “grow the government, but pay for it with non-progressive taxes” agenda, simply misreads the nature of the opposition.

Which raises the most important aspect of the fight for progressive taxation. It might seem that choosing between nonprogressive and progressive taxation is only a matter of deciding how to collect enough money to fund whatever amount of government spending that we choose to provide. The additional benefit of progressive taxation, however, is that it undermines the source of the political power of the rich, who are currently dead set against making American policies more progressive.

If we want to have a more progressive future, we have to understand that growing inequality at the top is self-reinforcing. Progressive spending will not change that. Progressive taxation will.