Forget Taxes for Redistribution: What to do about Inequality

America has discovered inequality. But, as Jared Bernstein says, dealing with that will be expensive. He comes up with a nice wish list of policies to help the poor:

What will work here is a large, publicly funded infrastructure program to begin to repair our deteriorating public goods, with the jobs targeted at the working poor. All of the above — the expanded earned-income tax credit, universal preschool, job-creating infrastructure — will take more tax revenue, and much of that new revenue will need to come from those at the top of the wealth scale.

He wags his finger at those who think there’s some free lunch that would let us help the poor without soaking the rich. Nope, he claims. Uncle Sam needs those taxes. The rich will have to pay-up.

We all love Robin Hood. Wouldn’t it be great if Kevin Costner rode his trusty stead through Wall Street, relieving the rapacious thieves of a few trillion of their ill-gotten gains, to be redistributed throughout the lands to all the deserving poor?

You remember Robin Hood from your children’s storybooks. Of course, those were well-laundered so as not to cause little kiddies to question the authority of your friendly monarch, the “good” King Richard the Lionheart. Robin was supposed to be a dispossessed aristocrat who helped restore the good king to his rightful throne.

Actually Robin was a yeoman living in feudal times, fighting the attempt by the lords to enclose the commons. He robbed the rich to give to the poor so that they could pay the rent-collecting sheriffs. Today he’d steal from the Banksters and pay the overdue mortgages to forestall foreclosures.

Take from the rich and give to the poor. We love that meme.

This is the third in a series on taxes. Virtually every liberal I know wants to raise taxes on the rich to pay for programs to benefit the poor. They see these taxes as necessary to reduce income inequality.

Me? I’d rather send Robin Hood to Wall Street to aim his straight and true arrows at the Black Hearts of the conniving CEOs that President Obama refuses to investigate for their crimes. Robin Hood and his Merry Band would cart them off to the dungeons where they belong.

I think that real punishment would do one heck of a lot more to reduce income inequality than taxes will ever do. Put a thousand of Wall Street’s “finest” behind bars.

Put such fear into our Bankster Class that before they try to push some new fancy derivative deal on a pension fund, they’ll imagine what it would be like waking up in a cell with a tattooed roomie named Bubba.

Trying to punish them with taxes is a fool’s errand. They’ll just raise their compensation package and buy tax exemptions from Congress.

And, as we know, Uncle Sam doesn’t need any stinking taxes to “pay for” jobs and income and healthcare and decent retirements for the poor. If you have unemployed resources, free lunches abound! Just put the resources to work, and you’ve got Bernstein’s wish list filled.

Forget taxes for redistribution. It will not work. It is a bad meme—especially in America. Once you let the greedy rich get their riches, trying to take them away is harder than prying guns out of the “cold dead hands” of NRA members.

Every time a progressive proposes a tax hike on the rich to pay for welfare, the Koch brothers giggle in gleeful delight. It is the surest way to prevent any policies that would help the poor. Tying tax hikes to sensible policy plays right into the greedy hands of the Conservatives and Regressives.

Did you ever hear a One-Percenter ask for a tax hike to bail out Wall Street? Come on, they are not that stupid.

What I’ve long argued is that we need “predistribution”, not “redistribution”.

Now, I know many will question my progressive credentials after that argument. But none other than Rick Wolff has just penned the same argument. Rick’s progressive credentials are beyond question. He’s been beating the inequality drum since long before Pikkety brought it to the attention of our nation’s liberal thought leaders a few months ago.

Let me quote from his powerful piece, Better than Redistributing Income,

Discussions of Piketty’s work show considerable support for redistribution. Yet history has shown both its friends and foes that redistribution has at least three negative aspects. First, redistribution mechanisms rarely last. Once established, progressive tax rates, social securities, safety nets, minimum wages, welfare states, and all the other mechanisms of redistribution can be and usually are undermined. The last 40 years, and especially the aftermath of the global crisis in 2008, starkly illustrate the undoing of redistribution.

Second, redistribution is socially divisive, often extremely. When taxes not only pay (quid pro quo) for government services rendered, but also serve to redistribute income, opposition usually grows. Some taxpayers suspect they pay more and get less in public services than others. Deteriorating economic conditions that lessen capacities to pay taxes intensify resistance. That often turns into opposition to income redistribution in principle. Lower-income people get demonized as lazy welfare-dependents. Racist and anti-immigrant oppositions get drawn into the mix, and so on. Meanwhile, advocates of redistribution make ethical appeals and/or threaten that without income redistribution, deepening income inequalities endanger capitalism and the social status quo.

Third, redistribution is costly.  Taxing, spending and regulating require large government bureaucracies funded by tax revenues. Opposition to taxes easily extends into opposition to bureaucracies like the IRS. Those bureaucracies usually intrude on privacy and quickly become objects of influence peddling, bribery, and abuse. Exposés of the latter provide further fuel to redistribution’s opponents.

Yep, let’s see: Unsustainable, divisive, and inefficient. Rick’s “predistribution” is worker’s co-ops. I’d add jobs for all.

Of course, I do not agree with Rick on this “taxes pay for government services” notion—except for the case of state and local taxes. But Rick is absolutely correct that when the public begins to see taxes as a payment for services rendered, then they start trying to calculate whether their own payment is “fair”.

That is a path to hell so far as government services are concerned. Since around 1970 that is exactly what has happened to state and local government taxes. In the economics literature it is called “devolution”—moving provision of most government services to the state and local government level, and forcing them to pay for it with taxes.

It encouraged the “donut holes” that devastated cities as the more affluent whites ran off to the suburbs.

With new infrastructure and higher income and wealth in the ‘burbs, relatively low tax rates could provide good services. The cities that were left behind had to raise tax rates on an ever-shrinking tax base to try to provide even basic services.

Witness Camden, NJ, which has essentially abandoned large swaths of its jurisdiction to “Escape from New York” dystopia.

This “stakeholder”, “taxes pay for the goodies I get” view has already reduced much of America to third world living standards. No wonder that Regressives pushed the devolution that wiped out cities.

Now the Progressives want to do the same at the Federal level.

The notion that you’ll significantly reduce inequality through taxes on the rich is a pipedream. How high would taxes have to be on the top few tenths of a percent? 50%? 75%? Forget it. They’d still be filthy rich and you’d be poor by comparison.

As I said in the first instalment, we don’t need taxes for revenue. We can justify taxes on the rich not for revenue purposes but as sin taxes. Look at it this way. Let’s raise sin taxes on the rich to reduce the sin of ill-gotten gains.

How high? 100%? Nay, 1000%. Take everything: all their income, all their wealth, the house, the car, the dog. Don’t let crime pay.

But you won’t collect the tax anyway. As the great Philadelphia Inquirer reporters Donald Barlett and James Steele (a UMKC alum, by the way) documented, rich folk don’t pay taxes because they purchase tax exemptions from Congress: See Barlett, Donald L.; Steele, James B. (1988-04-10) “A Rich Texas Widow Could Save $4 Million”. The Philadelphia Inquirer. p. A15.

Leona Helmsley was right: taxes are for little people.

Bill Clinton has a better idea. At a Pete Peterson “fiscal summit” he argued: you can’t do anything about the top 1% doing better “unless you want to start jailing people.”

One wonders what the One Percenter Peterson thought about that.

Why is it that Democratic Party Presidents can only tell the truth once they’ve left office? Yes, that is the same Bubba who auctioned off the Lincoln Bedroom to the highest bidder, filled every Administration position higher than toilet cleaner with a Gov’tSachs or CitiGov official, and found novel uses for his favorite cigar.

Do I “want to start jailing people”? Heck yes. If you want to reduce inequality, you’ve got to incarcerate the top 1%.

And give jobs to the rest.

About L. Randall Wray 64 Articles

Affiliation: University of Missouri

L. Randall Wray, Ph.D. is Professor of Economics at the University of Missouri-Kansas City, Research Director with the Center for Full Employment and Price Stability and Senior Research Scholar at The Levy Economics Institute.

His research expertise is in: financial instability, macroeconomics, and full employment policy.

Visit: L. Randall Wray's Page

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