As this book went to press, there was a spectacular example: The way even some Democrats rallied to the support of hedge fund managers, who receive an unconscionable tax break. Through a quirk in the way the tax laws have been interpreted, these managers—some of whom make more than a billion dollars a year—get to have most of their earnings taxed at the capital gains rate, which is only 15 percent, even as other high earners pay a 35 percent rate. The hedge fund tax loophole costs the government more than $6 billion a year in lost revenue, roughly the cost of providing health care to three million children.[8] Almost $2 billion of the total goes to just twenty-five individuals. Even conservative economists believe that the tax break is unjustified, and should be eliminated.[9]
Yet the tax break has powerful political support—and not just from Republicans. In July 2007 Sen. Charles Schumer of New York, the head of the Democratic Senatorial Campaign Committee, let it be known that he would favor eliminating the hedge fund loophole only if other, deeply entrenched tax breaks were eliminated at the same time. As everyone understood, this was a “poison pill,” a way of blocking reform without explicitly saying no. And although Schumer denied it, everyone also suspected that his position was driven by the large sums hedge funds contribute to Democratic political campaigns.[10]
The hedge fund loophole is a classic example of how the concentration of income in a few hands corrupts politics. Beyond that is the bigger story of how income inequality has reinforced the rise of movement conservatism, a fundamentally undemocratic force. As I argued in chapter 7, rising inequality has to an important extent been caused by the rightward shift of our politics, but the causation also runs the other way. The new wealth of the rich has increased their influence, sustaining the institutions of movement conservatism and pulling the Republican Party even further into the movement’s orbit. The ugliness of our politics is in large part a reflection of the inequality of our income distribution.
More broadly still, high levels of inequality strain the bonds that hold us together as a society. There has been a long-term downward trend in the extent to which Americans trust either the government or one another. In the sixties, most Americans agreed with the proposition that “most people can be trusted”; today most disagree.[11] In the sixties, most Americans believed that the government is run “for the benefit of all”; today, most believe that it’s run for “a few big interests.”[12] And there’s convincing evidence that growing inequality is behind our growing cynicism, which is making the United States seem increasingly like a Latin American country. As the political scientists Eric Uslaner and Mitchell Brown point out (and support with extensive data), “In a world of haves and have-nots, those at either end of the economic spectrum have little reason to believe that ‘most people can be trusted’…social trust rests on a foundation of economic equality.”[13]
In discussing ways to reduce inequality, it’s helpful to make a distinction between two concepts of inequality, and two kinds of inequality-reducing policies.
The first concept of inequality is inequality in market income. The United States is, of course, a market economy. Most people get most of their income by selling their labor to employers; people also get income from the market return to assets such as stocks, bonds, and real estate. So one measure of inequality is the inequality of the income people get from selling things. The distribution of market income is highly unequal and getting more so. In fact, market income is now as unequally distributed as it was in the 1920s.
But that’s not the end of the story. The government collects part of market income in the form of taxes, and transfers part of that revenue back to the public either in direct payments, like the Social Security checks that are the main source of income for most older Americans, or by paying for goods and services like health care. So another measure of inequality is the inequality of disposable income—income after you take taxes and government transfers into account. In modern America, as in all advanced countries, inequality in disposable income is less than inequality in market income, because we have a welfare state—though a small one by international standards. Taxes and transfers, which somewhat crimp the living standards of the rich while helping out the less fortunate, are the reason America in 2007 doesn’t feel quite as unequal as America did in the twenties.
Now, one way to reduce inequality in America is to do more of this: to expand and improve our aftermarket policies, which take the inequality of market income as given but act to reduce its impact. To see how this might work, let me describe an example of a country that does vastly more to reduce inequality than we do: France.
If you’re going through a rough patch in your life—or if your whole life has been rough—it’s definitely better to be French than American. In France, if you lose your job and have to take an inferior one, you don’t have to worry about losing your health insurance, because health insurance is provided by the government. If you’re out of work for a long time, the government helps keep you fed and housed. If you’re financially pinched by the cost of raising children, you get extra money from the state, as well as help with day care. You aren’t guaranteed a comfortable life, but your family members, especially your children, are protected against experiencing really severe material deprivation.
On the other hand, if things are going very well for you, being French has its drawbacks. Income tax rates are somewhat higher than they are in the United States, and payroll taxes, especially the amount formally paid by employers but in effect taken out of wages, are much higher. Also, the cost of living is high because France has a high value-added tax, a form of national sales tax. For people with high incomes these burdens aren’t fully offset by the advantages of government health insurance and other benefits. So a Frenchman whose compensation (including payroll taxes paid by his employer) is in the range we would consider upper-middle-class or higher has substantially less purchasing power than does an American receiving the same compensation.
In other words, France has extensive aftermarket policies that reduce inequality by comforting the afflicted but somewhat afflict the comfortable. In this France is typical of non-English-speaking Western nations. And even other English speakers do more to reduce aftermarket inequality than we do.
For example, the United States spends less than three percent of GDP on programs that reduce inequality among those under 65. To match what Canada does we’d have to spend an additional 2.5 percent of GDP; to match what most of Europe does would require an extra 4 percent of GDP; to match the Scandinavian countries, an additional 9 percent.[14] U.S. programs reduce poverty among the nonelderly by 28 percent, compared with 54 percent in Canada, 61 percent in Britain, and 78 percent in Sweden.[15] And these numbers actually understate the difference between the United States and everyone else, because they don’t take account of the unique American failure to guarantee health care to all.
8.
“Tax Breaks for Billionaires,” Economic Policy Institute Policy Memorandum no. 120, http://www.epi.org/content.cfm/pm120.
9.
See, for example, Jessica Holzer, “Conservatives break with GOP Leaders on a Tax Bill,”
10.
“In Opposing Tax Plan, Schumer Supports Wall Street Over Party,”
11.
Eric M. Uslaner and Mitchell Brown, “Inequality, Trust, and Civic Engagement,”
12.
14.
Irwin Garfinkel, Lee Rainwater, and Timothy Smeeding, “Equal Opportunities for Children: Social Welfare Expenditures in the English-speaking Countries and in Western Europe,”
15.
Timothy M. Smeeding, “Public Policy, Economic Inequality, and Poverty: The United States in Comparative Perspective,”