Category Archives: individual tax reform

How to Lower Income Inequality

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My last post provides evidence that income inequality has increased more under recent Democratic presidents than under Republican presidents.  Here is a brief summary of the argument:

  • Cheap money is of greatest value to those who have access to it.
  • The effects of the Bush housing bubble (in the 2000s) were more evenly distributed than for the Clinton stock market bubble (in the 1990s) or the Obama credit bubble.
  • Two earner households are the backbone of the American middle class.
  • During the first six years of the Obama presidency, the number of two-earner households declined, the number of single-earner households rose by 2.6 million and the number of no-earner households rose by 5 million. In other words, two-thirds of the increase in the number of households under Obama is accounted for by households with no-one working. This largely accounts for the shrinking middle class and the increase in inequality.
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Another way to consider this situation is to look at the labor force participation rate which has been steadily decreasing since the year 2000.  As the above chart shows, this trend is expected to continue indefinitely in the same downward direction.  Along with a slowing increase in the productivity rate, this constrains the U.S. economy’s capacity to expand. Clearly what is needed is faster economic growth in order to create more jobs and better paying jobs.  The way to accomplish this is with:

  • Tax Reform. Lower individual and corporate tax rates for all paid for by shrinking deductions and closing loopholes. More money in the hands of the middle class will stimulate demand. More money in the hands of small business will stimulate supply.
  • Expanded Earned Income Tax Credit. Putting more money in the pockets of low-income and marginally employed workers will encourage more of them to find work and stay in the workforce.

With all the headwinds holding the economy back, our national leaders (and would be leaders!) ought to be focusing much more attention on taking specific actions which would speed up economic growth.

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How Bad Is Income Inequality and How Do We Fix It?

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The latest news on the American economy is mixed. The unemployment rate fell to 5.9% in September but the labor force also fell by 97,000 last month.  The labor participation is now down to 62.7%, a level last seen in 1978.  On the plus side 248,000 new jobs were created but the share of the population employed stayed at 59%, less than its 59.4% level at the end of the recession in June 2009.  In other words, job growth is definitely picking up but not fast enough.
CaptureHow about income inequality?  One simple way of describing and understanding the degree of income inequality in the U.S. is to look at median household income and how it changes over time.  The above chart from the WSJ shows how the median U.S. household income fell from an all-time high of $56,895 in 1999 to $51,939 in 2013.  However it also climbed back up to $56,436 in 2007 before dropping precipitously until 2012.
Capture1The Global Strategy Group discovered in a recent survey that registered voters overwhelmingly rate economic growth as a higher priority than economic fairness.  This means that any policy designed to speed up economic growth is likely to receive favorable support by the electorate.
In a recent post I describe a plan for broad-based tax reform specifically designed to speed up economic growth.  It would involve an across-the-board cut in tax rates totaling about $500 billion per year, but completely paid for by closing loopholes and deductions which primarily benefit the wealthy.  The 64% of taxpayers who do not itemize deductions would receive a tax cut.  And they would likely spend this extra money in their pockets because they are precisely the middle- and lower-income wage earners with falling incomes.
An income tax redistribution like this would greatly reduce inequality but in a way which is designed to give the economy a big boost!

Five Sectors to Blame for Economic Weakness

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Several of my recent blog posts have addressed various issues relating to our slow growing economy.  In particular I have proposed a simple way to speed up economic growth: namely, broad-based tax reform at both the individual and corporate levels.  The idea is to lower tax rates across the board, paid for by closing loopholes and shrinking deductions.  At the individual level this could have the effect of putting as much as $250 billion per year in the hands of the middle and lower income wage earners who will surely spend most of it, thereby giving the economy a big boost.  The U.S. corporate tax rate is not internationally competitive.
In today’s New York Times the economics writer, Neil Irwin, has an article “Why Is the Economy Still Weak?  Blame These Five Sectors.”  The five sectors are, in order of magnitude of effect: housing, state and local governments, durable goods consumption, business equipment investment, and federal government.  See the chart below.
CaptureLet’s look in turn at each of these top five barriers to faster economic growth:

  • Housing. Not at all surprising with 24 million people either unemployed or underemployed. Young people especially cannot afford to buy their first home today.
  • State and Local Governments. These governmental units have to balance their budgets. When people have more money to spend, tax revenues will increase and so will public spending.
  • Durable Goods Consumption. These same 24 million people aren’t buying much new furniture or many new cars either. It makes complete sense.
  • Business Equipment Investment.  Lower corporate tax rates will incentivize our multinational firms to bring their foreign profits back home for reinvestment.
  • Federal Government. Unfortunately nothing can be done about this category! Federal deficit spending is way too high as it is and must come down.

Conclusion:  Using broad-based tax reform to put a large amount of money in the hands of middle and lower-income wage earners, and also reforming corporate taxes, will boost spending for four of the five main barriers to faster economic growth.  Why don’t we do it?