Another relatively easy move from a political point of view would be closing some of the obvious loopholes in the U.S. system. These include the rule described earlier that allows financial wheeler-dealers, such as hedge fund managers, to classify their earnings as capital gains, taxed at a 15 percent rate rather than 35 percent. The major tax loopholes also include rules that let corporations, drug companies in particular, shift recorded profits to low-tax jurisdictions overseas, costing billions more; one recent study estimates that tax avoidance by multinationals costs about $50 billion a year.[22]
Going beyond rolling back the Bush cuts and closing obvious loopholes would be a more difficult political undertaking. Yet there can be rapid shifts in what seems politically realistic. At the end of 2004 it seemed all too possible that Social Security, the centerpiece of the New Deal, would be privatized and effectively phased out. Today Social Security appears safe, and universal health care seems within reach. If universal health care can be achieved, and the New Deal idea that government can be a force for good is reinvigorated, things that now seem off the table might not look so far out.
Both historical and international evidence show that there is room for tax increases at the top that go beyond merely rolling back the Bush cuts. Even before the Bush tax cuts, top tax rates in the United States were low by historical standards—the tax rate on the top bracket was only 39.6 percent during the Clinton years, compared with 70 percent in the seventies and 50 percent even after Reagan’s 1981 tax cut. Top U.S. tax rates are also low compared with those in European countries. For example, in Britain, the top income tax rate is 40 percent, seemingly equivalent to the top rate of the Clinton years. However, in Britain employers also pay a social insurance tax—the equivalent of the employer share of FICA here—that applies to all earned income. (Most of the U.S. equivalent is levied only on income up to a maximum of $97,500.) As a result very highly paid British employees face an effective tax rate of almost 48 percent. In France effective top rates are even higher. Also, in Britain capital gains are taxed as ordinary income, so that the effective tax rate on capital gains for people with high income is 40 percent, compared with 15 percent in the United States.[23] Taxing capital gains as ordinary income in the United States would yield significantly more revenue, and also limit the range of tax abuses like the hedge fund loophole.
Also, from the New Deal until the 1970s it was considered normal and appropriate to have “super” tax rates on very-high-income individuals. Only a few people were subject to the 70 percent top bracket in the 70s, let alone the 90 percent-plus top rates of the Eisenhower years. It used to be argued that a surtax on very high incomes serves no real purpose other than punishing the rich because it wouldn’t raise much money, but that’s no longer true. Today the top 0.1% of Americans, a class with a minimum income of about $1.3 million and an average income of about $3.5 million, receives more than 7 percent of all income—up from just 2.2 percent in 1979.[24] A surtax on that income would yield a significant amount of revenue, which could be used to help a lot of people. All in all, then, the next step after rolling back the Bush tax cuts and implementing universal health care should be a broader effort to restore the progressivity of U.S. taxes, and use the revenue to pay for more benefits that help lower-and middle-income families.
Realistically, however, this would not be enough to pay for social expenditures comparable to those in other advanced countries, not even the relatively modest Canadian level. In addition to imposing higher taxes on the rich, other advanced countries also impose higher taxes on the middle class, through both higher social insurance payments and value-added taxes—in effect, national sales taxes. Social insurance taxes and VATs are not, in themselves, progressive. Their effect in reducing inequality is indirect but large: They pay for benefits, and these benefits are worth more as a percentage of income to people with lower incomes.
As a political matter, persuading the public that middle-income families would be better off paying somewhat higher taxes in return for a stronger social safety net will be a hard sell after decades of antitax, antigovernment propaganda. Much as I would like to see the United States devote another 2 or 3 percent of GDP to social expenditure beyond health care, it’s probably an endeavor that has to wait until liberals have established a strong track record of successfully using the government to make peoples’ lives better and more secure. This is one reason health care reform, which is tremendously important in itself, would have further benefits: It would blaze the trail for a wider progressive agenda. This is also the reason movement conservatives are fiercely determined not to let health care reform succeed.
Aftermarket policies can do a great deal to reduce inequality. But that should not be our whole focus. The Great Compression also involved a sharp reduction in the inequality of market income. This was accomplished in part through wage controls during World War II, an experience we hope won’t be repeated. Still, there are several steps we can take.
The first step has already been taken: In 2007 Congress passed the first increase in the minimum wage within a decade. In the 1950s and 1960s the minimum wage averaged about half of the average wage. By 2006, however, the purchasing power of the minimum wage had been so eroded by inflation that in real terms it was at its lowest point since 1955, and was only 31 percent of the average wage. Thanks to the new Democratic majority in Congress, the minimum is scheduled to rise from its current $5.15 an hour to $7.25 by 2009. This won’t restore all the erosion, but it’s an important first step.
There are two common but somewhat contradictory objections often heard to increasing the minimum wage. On one hand, it’s argued that raising the minimum wage will reduce employment and increase unemployment. On the other it’s argued that raising the minimum will have little or no effect in raising wages. The evidence, however, suggests that a minimum wage increase will in fact have modest positive effects.
On the employment side, a classic study by David Card of Berkeley and Alan Krueger of Princeton, two of America’s best labor economists, found no evidence that minimum wage increases in the range the United States has experienced led to job losses.[25] Their work has been furiously attacked both because it seems to contradict Econ 101 and because it was ideologically disturbing to many. Yet it has stood up very well to repeated challenges, and new cases confirming its results keep coming in. For example, the state of Washington has a minimum wage almost three dollars an hour higher than its neighbor Idaho; business experiences near the state line seem to indicate that, if anything, Washington has gained jobs at Idaho’s expense. “Small-business owners in Washington,” reported the New York Times, “say they have prospered far beyond their expectation…. Idaho teenagers cross the state line to work in fast-food restaurants in Washington.”
22.
Kimberly A. Clausing, “Multinational Firm Tax Avoidance and U.S. Government Revenue” (working paper, Wellesley College, Wellesley, MA, 2007).
24.
Piketty and Saez, 2005 preliminary estimates, http://elsa.berkeley.edu/~saez/TabFig2005prel.xls.
25.
David Card and Alan B. Krueger, “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania,”