Income Distribution Policy
Timothy Taylor has a must-read post. (I could say that almost every day, but today I am going to provide additional commentary.) It’s long, but here is a brief excerpt.
On the tax side, the U.S. tax code is already highly progressive compared with these other countries…This finding is surprising to a lot of Americans, who have a sort of instinctive feeling that Europeans must be taxing the rich far more heavily. But remember that European countries rely much more on value-added taxes (a sort of national sales tax collected from producers) and on high energy taxes. They also often have very high payroll taxes to finance retirement programs. These kinds of taxes place a heavier burden on those with lower incomes.
Taylor goes on to point out that it is on the benefits side that America is less redistributive. We give relatively more to the elderly non-poor and relatively less to the non-elderly poor. In some sense, the goals of maintaining entitlement programs as they are and redistributing income to the poor are in conflict. I do not expect anyone on the left to see it that way, of course.
In fact, Megan McArdle reminds us that we tax the poor at high marginal rates by phasing out benefits at low levels of income.
A couple of days ago, I referred to the fact that poor people face some of the highest marginal tax rates in America. I received several emails from economics professors, gently correcting me: they face all the highest marginal tax rates in America. Because they lose benefits and tax credits, it can actually cost them money to get better jobs.
I am in the process of writing an essay about the need for a government reorganization, in order to make the executive branch leaner and more effective. One example of “more effective” would be to have a single agency that deals with economic opportunity to oversee the various redistribution programs, identify problems with high implicit marginal tax rates, and make recommendations for changes. As it stands now, different agencies deal with housing, food stamps, education, and various other programs that address economic opportunity. The resulting waste and inefficiency is a problem.