Taxes do not drive income inequality....
“I was angry this weekend, listening to the spin coming out of the administration, about the failure of the supercommittee, and that the president knew it was doomed for failure, so he didn’t get involved. Well then what the hell are we paying you for?” Christie said during a press conference in Camden, N.J. “It’s doomed for failure so I’m not getting involved? Well, what have you been doing, exactly?”
Michael Barone calls attention to a new CBO study which finds that entitlement spending plays a bigger role in widening income inequality than do federal taxes. MB quotes House Budget Committee Chairman Paul Ryan (WI):
Many may find the results of the CBO study surprising. It turns out, Ryan reports, that federal income taxes (including the refundable Earned Income Tax Credit) actually decreased income inequality slightly between 1979 and 2007, while the federal payroll taxes that supposedly fund Social Security and Medicare slightly increased income inequality. That's despite the fact that income tax rates are lower than in 1979 and payroll taxes higher.
Perhaps even more surprising, federal transfer payments have done much more to increase income inequality than federal taxes. That's because, in Ryan's words, "the distribution of government transfers has moved away from households in the lower part of the income scale. For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers."
MB cites three more points made by Ryan:
First, reductions in some transfer payments haven't hurt the living standards of most low-earners. The prime example is the welfare reform act of 1996, which reduced transfers to single mothers but induced many of them to find jobs that left them better off economically and, probably, psychologically.
Second, Americans aren't trapped in one segment of the income distribution. A Tax Journal analysis of individual income tax returns found that 58 percent of those in the lowest income quintile in 1996 had moved to a higher income segment by 2005. This comports with common experience. We move up and down the income scale in the course of a lifetime.
Finally, the inflation adjustment used in the CBO analysis was the Consumer Price Index. But that tends to overstate inflation (as any indexes tends to do, since it measures the cost of a static market basket of goods and services). A study by Chicago economist Christian Broda found that prices for goods purchased by low-earners have been rapidly decreasing, while prices for goods of high-earners have increased. Kids' school clothes may be cheaper at Walmart than they were years ago, while prices at Neiman Marcus keep increasing.
The remedy? First, reign in entitlement spending, which transfers money from the young working poor to the middle & upper classes. Second, close tax loopholes, which also mostly benefit the middle class and the rich. Third, do NOT raise the top rate, which can hurt economic growth. Walled-off entitlement spending also blocks federal budget reform, and thus impedes prospects for renewed economic growth.
The prime casualty of a failure to control entitlement spending will be the defense budget. This searing RNC defense cuts ad (2:40) dramatically illustrates the vast harm our defenses would suffer.
Policy ace Peter Ferrara explains why Newt Gingrich's entitlement reform plan is the best out there, maximizing personal choice, phasing out inter-generational transfers and the government's role.
Bottom Line. For decades demagoguery from Democrats & their mainstream media allies has trumpeted how tax cuts favor the wealthy and entitlement spending does not. It has long been known that mobility between income quintiles is a fact of economic life, but this has always been downplayed. Now it turns out that the taxes thesis is largely the stuff of myth.
Letter from the Capitol, LFTC, Economy, Conservative Politics
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