Tim Smeeding on Inequality
By David Henderson
Lane Kenworthy writes:
Tim Smeeding knows more than virtually anyone about inequality and poverty in the United States and other rich nations. I asked him what he recommends to reduce income inequality. His response:
1. Tax appreciated assets when inherited or transferred inter-vivos.
2. Raise income tax rates on capital income — capital gains and dividends — to levels just below labor, e.g. maximum rate at true current marginal tax rate or 30%. And curtail practices of defining earnings as capital income, e.g. “carried interest” provisions.
3. Reduce political rents: close tax loopholes that benefit mainly the wealthy (e.g. cap on deductions for employer-provided health insurance); turn deductions that benefit the richest into credits, many refundable, to benefit lower- and middle-income families; allow drug purchases at “best price” rates, not market rates, for Medicare; get rid of oil and gas exploration tax subsidies; limit and phase out agricultural subsidies.
4. Use tax revenue to improve public infrastructure (including internet).
5. Improve college prep classes and college counseling for students.
6. More and better apprenticeships (get employers involved).
7. Raise the minimum wage to $10 per hour, index it, and enforce labor laws (e.g. on scheduling).
8. Universal child allowance at $2,500 per child, refundable if this is more than income taxes owed, and separate from the EITC.
9. Profit sharing among all long-term (full year or more) employees.
Some critics of inequality seem to care more about reducing inequality than about making workers better off. Tim Smeeding seems to be one of them. Granted that some of his proposals would make workers better off, but some of them would make workers, including low-income workers, worse off.
There are some good proposals here, especially on limiting and phasing out agricultural subsidies. But #1 and #2, while they would probably reduce after-tax inequality, would cause slower growth. The reasoning is that the tax on capital discourages capital formation; with less capital per worker, labor’s marginal product is lower than otherwise; and with lower marginal product of labor than otherwise, real wages are lower than otherwise. Professor Smeeding might disagree with this reasoning. But I would be interested in seeing why.
#6 is interesting and could be good. I hope Professor Smeeding realizes that the main way to make this happen is to get government out of the way: reduce the compulsory schooling age from its current 18 in most states to 16 or even 14. And, of course, reduce or abolish the minimum wage so that apprenticeships would be worthwhile for employers to offer. But then I have trouble reconciling #6 with #7.
I won’t comment on all of the proposals but I do find #9 perplexing. Granted that in a short space, Professor Smeeding can’t lay out all the details, but I wonder how #9 would work. I’m guessing that he would require it by law. That would mean that a lot of workers would, by their own values, be hurt. When a worker’s employer is a publicly owned firm, that is, a firm that members of the public can buy shares in, workers, even short-term workers, already have the option of profit sharing. Why require workers who have shown by their behavior that they don’t want profit sharing to participate in it? And one can certainly see why workers would not want profit sharing. Their fortunes are already tied up with the fortunes of the firm. A proposal for profit sharing would tie them up even more and make their investments even less diversified.
Also, notice that in his list of 9 items, there is no mention of getting rid of, or at least cutting back, the occupational licensing regulations that Morris Kleiner and Alan Krueger have written about.
HT to Mark Thoma.