How to Increase Growth and Decrease Inequality at the Same Time II. A Concrete Example

 

The United States has two fundamental economic and fiscal problems at the present time.  First of all, the economy is growing too slowly to create enough new jobs.  In fact, there are now 24 million people either unemployed or underemployed.  Secondly, federal tax revenue is not sufficient to pay the bills.  Of course, these problems are interrelated.  If the economy were growing faster, more tax revenue would be generated and deficit spending would be lower.
CaptureAt the same time, changes in society, such as globalization and technological progress, are creating higher levels of inequality.  Economic inequality is inevitable in a free society but too much of it will create resentment.  The best way to minimize such resentment is to make sure that incomes are rising for all.  In other words, first speed up growth.  If inequality can also be reduced, so much the better.
A few days ago my post “How to Increase Growth and Decrease Inequality at the Same Time!” presented such a plan.  The idea is to enact broad-based tax reform, whereby tax rates are lowered for everyone, offset by shrinking tax deductions.  The 64% of taxpayers who do not itemize deductions will receive a big tax cut.  Since they are the lower and middleclass wage earners with stagnant incomes, they will tend to spend their tax savings, thereby giving the economy a boost.  But this means that the 36% of (wealthier) taxpayers who do itemize deductions will, on average, end up paying higher taxes.  Overall, this represents a shift from the wealthy to the less wealthy and therefore lessens inequality.
Here is a concrete example to illustrate the magnitude of what can be accomplished:

  • Individual tax deductions total about $1 trillion per year.
  • Let’s suppose that these deductions are cut in half to $500 billion per year.
  • Let’s further suppose that half of this amount, or $250 billion per year, is cut from the taxes of the 64% who do not itemize deductions.
  • If these 64% spend just 2/3 of their new income (instead of saving it or paying off debt), this will total $170 billion which is 1% of GDP.
  • This would increase the rate of growth of GDP from the 2.2% average, since the end of the Great Recession, to 3.2%. This represents an enormous boost to the economy and would return average GDP growth to about its 3.3% average since 1947.

I emphasize that this is an oversimplified illustrative example to demonstrate what can be achieved with a plan of this nature.  Hopefully it will be more thoroughly analyzed by an expert economist, which I am not!

5 thoughts on “How to Increase Growth and Decrease Inequality at the Same Time II. A Concrete Example

  1. Some actual numbers– excellent progress! But I don’t see how this addresses my points made in the previous post:

    1.) I made the point that Republicans threatened to default on U.S. debt rather than accept a tax increase of 25 billion on the top 1%. You respond with an analysis that is an effective tax increase of 500 billion on the top 1/3 of tax payers– *20 times* the amount Republicans rejected. You might as well be suggesting that we improve growth by selling magic Unicorns. Is it really necessary for you to ask in each of your posts “why-oh-why doesn’t this happen?” The answer to that is obvious– *your* party would rather have nuclear war than implement your plan.

    2.) Your analysis puts the effect of your proposed stimulus at 1% of GDP, which you say will put growth at the 70 year average of 3.3% which is supposedly going to alleviate wealth inequality, totally ignoring the data I posted showing that 90% of the inequality we see now occurred during two periods when growth was 4% and 4.5%. I ask again– what is your evidence that simply having growth at 3-3.5% would do *anything* about wealth inequality? You can’t make things become true by simply repeating them over and over.

    3.) If it was true that growth in the 3-3.5% range would alleviate inequality, then there is no need for your proposal at all– growth is already in the 3-3.5% range for 2014:

    http://www.businessweek.com/articles/2014-07-30/u-dot-s-dot-gdp-growth-maybe-possibly-ask-again-later-hits-4-percent

    So your magic elixir has been taken; should we expect inequality to start shrinking?

    Bottom line– whether or not reducing rates/closing loopholes is a good idea in principle (and it might be), I have provided firm evidence from credible sources that this kind of proposal has no chance of passing giving the current political climate and, even if it did, provided evidence that the growth effects alone of such a move are unlikely to affect wealth inequality.

    You, on the other hand, have provided precisely zero evidence that the resulting growth would affect wealth inequality at all. It is possible that your plan would affect wealth inequality, but it almost certainly would *not* be due to that little bit of increased growth. It would happen because you are really proposing a half a trillion dollar redistribution of wealth. That’s what would do it, not the increases of GDP growth to average.

    Along those lines, I think it’s interesting that you think a major redistribution of wealth would have positive effects on growth.

    Are you still a Republican? Because redistributing wealth through tax code changes is what the Democrats have been trying to do for years, while Republicans always block that approach on the basis that it would kill entrepreneurialism and therefore growth.

    Again– no need to ask why our leaders can’t get together and implement your plan; Republicans simply will not do it. What you should post is what needs to be done to get Republicans on board. What would be their incentive? How would you convince them? That would be more useful than just acting as if the barrier is just some kind of generalized dysfunction.

    The problem, as always, is Republican ignorance, stupidity, and detachment from reality.

    What’s your plan for dealing with that?

    • I am a political outsider. I have no idea what the current political hierarchy will or will not accept. I am trying to propose policies to address our most fundamental problems in effective ways. In this instance I am proposing a way to speed up economic growth in order to create more and better paying jobs, and also to bring in more tax revenue in order to lower deficit spending. My plan accomplishes this by shifting $250 billion from wealthier taxpayers to the less wealthy. In this way it decreases income inequality. This is a side effect, although a very desirable one. The main purpose is to stimulate growth.
      To me a policy change like this represents a significant step in the right direction. That is all we can ever hope to accomplish at one time.

      • I’m having trouble following you. You usually state that what is needed to solve the wealth inequality problem is more growth, and that the point of your rate reduction is to provide that growth. So that’s why I chose to respond and refute the connection between growth and wealth inequality.

        But in response to my criticism, you’re saying that your rate cuts will provide growth, but the wealth inequality problem will be solved by the redistributionist effects of your proposed tax code changes (and not by the growth per se), i.e., there is not a direct connection– it’s a side effect.

        If they’re not really related (in a cause and effect way), why conflate them and make it sound like one is dependent on the other? Disconnecting the two answers my argument, but it makes you look inconsistent.

        Are you changing positions on this? If so, why don’t you just support the Democrats? They have (for many years) been proposing tax increases on the rich and decreases for the non-rich for redistribution purposes. I have never heard you embrace any of those proposals– in fact you’ve always been against them as far as I remember.

        And make no mistake– you can call it “closing loopholes,” but that’s semantics. What you’re proposing is to raise taxes on the rich and cut them for the poor– just like the Democrats prescribe. And you’re not denying that it’s redistribution of wealth, so it sounds like you’re now toeing the Democrat’s line.

        BTW, I’m not against that– wealth inequality, despite what conservatives say, is rarely about hard work and clean living. It’s usually the rich using their financial power to change laws so that wealth is redistributed from the poor to themselves. And the only way that gets fixed it to reverse it– redistribution from the rich back to the poor.

        So I’m OK with that– just surprised that you are and your current response does not appear to be congruent with your previous postings.

  2. The Republicans are too hung up on social issues and the Democrats are too hung up on inequality. You keep trying to put me in one camp or the other when I’m trying to be nonpartisan. I actually view my tax shift proposal as quite similar to Romney’s tax reform proposal during the 2012 campaign. However it does involve a shift in income from the wealthy to the middle class. But its purpose is not to redistribute income but to boost the economy by putting more money in the hands of middle and lower-income wage earners who will surely spend most of it. This new money for the un-wealthy has to come from somewhere and there’s only one place to get it from – the wealthy.
    But, as I constantly try to emphasize, the purpose is to make the economy grow faster. I would think that almost everyone, Democrat or Republican or otherwise, would agree that this is a good idea and would support any credible plan to accomplish this.

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