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Tax Cuts or Tax Reform? (and the Implications for Inequality)

Recent Tax Policy Choices Have Widened Disparities; More Cuts Could Do the Same

Photo of Joseph Stiglitz

Does inequality hurt economic growth? Nobel Laureate Joseph Stiglitz says yes.

Martin Luther King Day is a good occasion to think about disparities in income and wealth, and the policy decisions that contribute to the growing chasm between the rich and poor. We need to think carefully about which policy choices can reduce that gap, which will make it wider, and what the failure to address the problem means for the economy.

A new report issued by the Working Poor Families Project examines the widening economic gap. Their analysis of Census Bureau data found that the current economic recovery is leaving many working families behind. The number of working families who were low income (below 200% of the poverty level) grew to 10.4 million in 2011, which was 32% of all working families, and they included 23.5 million children.

In Wisconsin, there were 174,000 low-income working families in 2011, comprising 29% of all working families in our state.  A report we issued in late November, in conjunction with the Center on Wisconsin Strategy, uses Department of Revenue data to illustrate the widening chasm between the rich and the poor in Wisconsin.

Tax policy choices are one of the factors that have contributed to the growing rift. An op-ed column by Jack Norman in Sunday’s Journal Sentinel challenges state lawmakers to work on comprehensive tax reform, rather than simply a new tax cut.  He urges policymakers “to be tax reformers, not just tax panderers” seeking simplistic tax cuts.  His column lays out an excellent list of questions that lawmakers and the public should ask about proposed tax changes.

One of Norman’s recommendations is to “compare effects at the top and bottom of the income scale.”  He points out that the sort of income tax rate cut that has been suggested by Governor Walker and Assembly Speaker Robin Vos would provide no benefit to 40% of Wisconsin tax filers.

Inequality shouldn’t only be a concern among liberals, because it has very broad negative consequences.  Joseph Stiglitz, a Nobel laureate in economics, wrote a recent commentary in the New York Times explaining four important ways that America’s growing inequality “is squelching our recovery.”  He contends that “inequality stifles, restrains and holds back our growth.” Stiglitz adds:

When even the free-market-oriented magazine The Economist argues — as it did in a special feature in October — that the magnitude and nature of the country’s inequality represent a serious threat to America, we should know that something has gone horribly wrong.

The widening rift mustn’t be something that we only think about on Martin Luther King Day.  We need to keep it foremost in our minds as we contemplate budget choices Wisconsin lawmakers will make in the coming months.

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Public domain photo by Gustavo Benitez.

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