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On Taxes, Redistribution, and the Need to Focus on Pre-Tax Inequality

Ryan Grim has some backstory on the White House’s aggressive opening bid last night. It turns out that President Obama offered this same deal to Republicans earlier this month at the White House. Republicans expected that Tim Geithner would bring a softer offer with him, part of the trend verified by recent history of the President negotiating with himself. But he didn’t.

At the heart of the matter here is a belief, separate and apart from the question of austerity, that tax rates are simply too low, and must go up. Increasing taxes at this time would actually represent a form of austerity. But it also would represent an attempt, however modest, to deal with spiraling inequality. I’m sympathetic to the view that pre-tax inequality, due to wage stagnation and the decline of labor unions and bad corporate governance and the ballooning of the finance sector, is actually the bigger driver here. But the two go hand-in-hand, and the truth is that the tax burden for almost all Americans, particularly those at the top, has shrunk. Norquistism worked, in other words, shielding the rich from having to contribute to pay for societal priorities.

According to an analysis by The New York Times, the combination of all income taxes, sales taxes and property taxes took a smaller share of their income than it took from households with the same inflation-adjusted income in 1980.

Households earning more than $200,000 benefited from the largest percentage declines in total taxation as a share of income. Middle-income households benefited, too. More than 85 percent of households with earnings above $25,000 paid less in total taxes than comparable households in 1980.

Lower-income households, however, saved little or nothing. Many pay no federal income taxes, but they do pay a range of other levies, like federal payroll taxes, state sales taxes and local property taxes. Only about half of taxpaying households with incomes below $25,000 paid less in 2010.

Conservatives have no real policies on inequality, other than to say that they support it. The victors receive the spoils, and everyone else just has to work harder. So opening the door a crack on reducing post-tax inequality, on redistribution, has an important political effect, regardless of the policy implications.

I think this interview with Chrystia Freeland offers the best explanation of the resistance to redistribution from those at the top:

CF: But remember, there are two different issues. One is, are you going to pay a higher tax bill? At the end of the day, rich people really don’t want to, and I think they’re finding they’re more averse to it than they actually thought they would be as it comes closer to reality. But second, I think what Obama has done is quite striking: he has said the economy isn’t working for everybody, and he has said it’s possible in this economy for economic acts to take place that are really good for a wealthy person and neutral or even bad for the middle class. The Bain Capital ads were such a lightning rod and so alienating even to some Democrats because they put that on the table. That is something no one has said in political power for 30 years. That is profoundly threatening for this group. It’s threatening politically, but it’s also emotionally and morally threatening.

I think the thing which has been so comfortable about being a member of the super-rich, especially in the United States, is that you have been able to feel that the act of becoming wealthy, absent everything else, was also an act of civic virtue. That’s so wonderful! You’re not just pursuing your own self-interest talking about lower taxes at the top but the collective self-interest.

Obama has pursued this in an extremely modest fashion – a tiny increase in top tax rates along with the “more education and skills” dodge – but the argument that you might need more redistribution deeply offends those who think that an economy that has made them fabulously wealthy is also the proper mode for shared prosperity, even when it’s not.

I think that we’re missing a huge element of pre-tax inequality that government policy can ameliorate. “Pity-charity” liberalism will always hit a wall with demonization as “socialism.” Actually targeting the distortions in markets that allow wealth to flow in one direction is a much smarter strategy that appeals to American self-conceptions of fairness. You can get part of the way there with a higher tax base, but you’re going to have to attack the large financial sector, the tragedy of corporate governance, the use of worker power and collective bargaining, and more. Unfortunately, we’re only looking at one side of the equation.

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David Dayen

David Dayen

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