One “easy” way for the United States to reduce inequality beyond the effective reduction we’d achieve with universal health care would be for America to do considerably more to help the unlucky through public aid of various kinds, paid for with higher taxes on the well off. The additional spending would probably consist largely of expanding programs we already have: an expanded earned income tax credit, a more generous food stamp program, bigger housing aid, and so on. It could also include other items such as child support and help with day care. I’ll talk about where the additional revenue could come from later in this chapter.
But don’t high taxes and an extensive welfare state remove the incentives to work and innovate? Gross domestic product per capita in France is only 74 percent of GDP per capita in the United States. Isn’t that a compelling argument against moving in a French direction? Well, France and other countries with generous social programs do have serious economic problems. Those problems are not, however, as simple or as closely related to the generosity of social programs as you might think.
France does have much lower GDP per person than the United States. That’s largely because a smaller fraction of the population is employed—French GDP per worker is only 10 percent lower than in the United States.[16] And that difference in GDP per worker, in turn, is entirely because French workers get much more time off: On average French workers put in only 86 percent as many hours each year as U.S. workers.[17] Worker productivity per hour appears to be slightly higher in France than in the United States.
The real question is which aspects of the French difference represent problems, and which simply represent different and possibly better choices. The lower number of hours per worker in France seems to fall in the second category. In the United States vacations are very short, and many workers get no vacation at all. France has essentially made a decision, enforced by legal requirements on vacation time as well as union settlements, to trade less income for more time off. And there’s some evidence that this decision actually makes most people better off. As one recent study of the difference in working hours between Europe and the United States points out, polls suggest that people would like to work shorter hours, and international comparisons of reported “life satisfaction” seem to say that working less improves the quality of life even if it reduces income. Yet it’s very difficult for any individual, operating on his or her own, to trade less income for more leisure. French rules and regulations that solve this problem by requiring that employers provide vacation may actually be a good thing, even though they reduce GDP.[18]
In addition to working fewer hours than Americans, the French are less likely to work at all. To be more specific: In France the young and old tend not to be employed. About 80 percent of French prime-age adults, those between the ages of twenty-five and fifty-four, are employed, which is almost exactly the same as the U.S. number. However, only 25 percent of French residents aged fifteen to twenty-four are employed, compared with 54 percent in the United States, and only 41 percent of those aged fifty-five to sixty-four are employed, compared with 62 percent here.[19] The question is whether these low employment rates should be viewed as a problem.
The low rate of employment among young people in France is less of a problem than it may appear. It does to some extent reflect regulations that make it hard for employers to fire workers, and therefore make them reluctant to hire workers in the first place. A close examination, however, reveals that other reasons for low employment of young people in France are probably more important. The French are more likely than Americans to stay in schooclass="underline" 92 percent of French residents aged from fifteen to nineteen are in school, and 45 percent of those aged twenty to twenty-four, compared with 84 and 35 percent, respectively, in the United States. And only about 10 percent of French students hold jobs at the same time, compared with about 20 percent in the United States. Presumably, in France the combination of free education and public financial support lets young people from lower-income families concentrate on their studies, while in America they either have to drop out of school or work their way through. This sounds like a virtue, not a vice, of the French system.[20]
Once they reach prime working age, as we’ve seen, the French are just as likely to be employed as we are—a fact that’s very much at odds with the picture of a largely idle work force often painted in U.S. news reports. The only place where the French have a serious problem—and just to be clear, it’s a very important problem—is in the low employment and labor-force-participation rates of older workers. This reflects some major policy mistakes—especially the decision, a quarter century ago, to lower to sixty the age at which workers were entitled to full pension benefits. This both encouraged early retirement and imposed large burdens on taxpayers.
So the French make mistakes. But saying, “France has mismanaged its pension policies” is very different from saying, “The French economy has been crippled by an oversize welfare state.” It’s deeply misleading to use the French example to argue against doing more to help the poor and unlucky.
Suppose we agree that the United States should become more like other advanced countries, whose tax and benefit systems do much more than ours to reduce inequality. The next question is what that decision might involve.
In part it would involve undoing many of the tax cuts for the wealthy that movement conservatives have pushed through since 1980. Table 11 shows what has happened to three tax rates that strongly affect the top 1 percent of the U.S. population, while having little effect on anyone else. Between 1979 and 2006 the top tax rate on earned income was cut in half; the tax rate on capital gains was cut almost as much; the tax rate on corporate profits fell by more than a quarter. High incomes in America are much less taxed than they used to be. Thus raising taxes on the rich back toward historical levels can pay for part, though only part, of a stronger safety net that limits inequality.
| Table 11. Three Top Tax Rates (Percentages) | |||
|---|---|---|---|
| Top Tax on Earned Income | Top Tax on Long-Term Capital Gains | Top Tax on Corporate Profits | |
| 1979 | 70 | 28 | 48 |
| 2006 | 35 | 15 | 35 |
Source: Urban-Brookings Tax Policy Center, http://taxpolicycenter.org/taxfacts/tfdb/tftemplate.cfm.
The first step toward restoring progressivity to the tax system is to let the Bush tax cuts for the very well off expire at the end of 2010, as they are now scheduled to. That alone would raise a significant amount of revenue. The nonpartisan Urban-Brookings Joint Tax Policy Center estimates that letting the Bush tax cuts expire for people with incomes over two hundred thousand dollars would be worth about $140 billion a year starting in 2012. That’s enough to pay for the subsidies needed to implement universal health care. A tax-cut rollback of this kind, used to finance health care reform, would significantly reduce inequality. It would do so partly by modestly reducing incomes at the top: The Tax Policy Center estimates that allowing the Bush tax cuts to expire for Americans making more than two hundred thousand dollars a year would reduce the aftertax incomes of the richest 1 percent of Americans by about 4.5 percent compared with what they would be if the Bush tax cuts were made permanent. Meanwhile middle-and lower-income Americans would be assured of health care—one of the key aspects of being truly middle class.[21]
16.
Bureau of Labor Statistics, “Comparative Real Gross Domestic Product per Capita and per Employed Person,” ftp://ftp.bls.gov/pub/ special.requests/ ForeignLabor/flsgdp.txt.
17.
See Organization for Economic Cooperation and Development (OECD) Statistical Index, http://dx.doi.org/10.1787/075816831582.
18.
Alberto Alesina, Ed Glaeser, and Bruce Sacerdote, “Work and Liesure in the U.S. and Europe: Why So Different?” (National Bureau of Economic Research working paper no. 11278, Apr. 2005.
20.
Data from OECD
21.
Tax Policy Center, “Options to Extend the 2001–2006 Tax Cuts, Static Impact on Individual Income and Estate Tax Liability and Revenue ($ billions), 2008-17,” Table T07-0126, http://taxpolicycenter.org/ TaxModel/tmdb/Content /PDF/T07-0126.pdf.