Beyond the Tax Issue

As the campers in Harvard Yard are fond of reminding us, the top one percent of American households earn 24 percent of national income. The same one percent has seen three-fifths of total income growth from 1979 to 2007. Although these numbers may be disturbing, we should keep in mind that the vast majority of Americans, save a small percentage at the bottom, live very comfortably by global standards. Even among the 46 million citizens below the federal poverty line in 2009, less than a fifth reported being hungry at any time during the previous year, and only four percent were temporarily homeless. The vast majority of “poor” households had modern amenities including air conditioning, microwaves, cars, and cable or satellite TV.

Nevertheless, a non-negligible number of Americans live in genuine poverty, and improving middle class living standards can only be a good thing. The method of helping the “99 percent” that seems to get the most press coverage is a government that acts like Robin Hood, taking from the rich and giving to the poor through redistributive taxation. While a progressive tax code is a valuable tool, it has the side effect of discouraging work and risk taking among the most productive citizens. As progressive as the federal tax code already is, and as slowly as the economy is growing, any quest to raise living standards across the board should begin with reforms that are less likely to deter economic growth.

Before making the top one percent pay even more than the 38 percent of federal individual income tax revenues that they already contribute, the government could start by eliminating or reforming programs that redistribute from the poor to the rich. Take public lotteries, which state governments operate as monopolies to raise additional revenue. Thanks in part to advertising in low-income areas, the poor spend a much greater proportion of their income playing the lottery than the rich, and some evidence suggests they actually spend more as a dollar amount. Rather than encouraging the poor to waste their hard-earned money playing the lottery, states should raise revenue through equitable channels and create incentives for the poor to save.

A more significant deterrent to saving by the poor is Social Security, which will need to be reformed in the coming years to ensure long-term solvency. Despite its progressive benefit schedule, Social Security taxes low-income citizens most heavily relative to the benefits they receive. Since poorer citizens tend to start working earlier and die at a younger age than the wealthy, they spend more years paying taxes and fewer years collecting retiree benefits. Rather than raising taxes or the retirement age, Congress can correct this imbalance and improve the program’s solvency by simply cutting benefits for the wealthy.

The most obvious way to help the 99 percent is by improving their earning potential, which might include enhancing the physical health of the 16 percent of Americans who lack health insurance. While the constitutionality and fiscal sustainability of last year’s Affordable Care Act remains an open question, the law stands a good chance of helping more Americans become gainfully employed. Another possibility is to narrow the socioeconomic achievement gap in primary and secondary education, which remains stubbornly large ten years after the No Child Left Behind Act.  The law has had modest success in boosting test scores, but more stringent standards for failing schools as well as mandatory remedial instruction for underperforming students could accelerate achievement growth, particularly for low-income students.

In addition to human capital, the 99 percent would benefit from more investment in physical capital, which requires an increase in the saving rate. While national saving has recovered since the current economic downturn began, it reached one percent of gross national income in 2004, the lowest level in 50 years. More income saved means lower interest rates, which enhances the economy’s productive capacity by encouraging capital formation and thereby stimulates demand for workers. The first step in raising national saving is reining in the federal budget deficit, though revenue-neutral reforms to certain aspects of the tax code, particularly the capital gains tax, could encourage private saving.

Like redistributive taxation, these ideas would improve living standards for the poor and middle class. The difference is that they would not retard economic growth, and improvements in human and physical capital are sure to accelerate growth. In a lagging economy like this one, any policy that counteracts growth should be a last resort.

Peyton R. Miller ’12 is a government concentrator in Winthrop House. His column appears on alternate Tuesdays.