Standard and Poor’s Says Inequality Suppresses Economic Growth and State Revenue
Concerns about increases in income inequality were voiced from a surprising perspective today, when Standard and Poor’s (the bond rating agency) issued a lengthy report titled “Income Inequality Weighs On State Tax Revenues.” The report concludes that “disparity is contributing to weaker tax revenue growth by weakening the rate of overall economic expansion.”
The authors offer this explanation for the correlation between income disparities and economic growth:
…rising income inequality is a macroeconomic factor that acts as a drag on growth. There is evidence, although not conclusive at this point, that the higher savings rates of those with high incomes causes aggregate consumer spending to suffer. And since one person’s spending is another person’s income, the result is slower overall personal income growth despite continued strong income gains at the top.
An article in today’s Washington Post sums up the findings in clearer terms:
Even as income has accelerated for the affluent, it has barely kept pace with inflation for most other people. That trend can mean a double whammy for states: The wealthy often manage to shield much of their income from taxes. And they tend to spend less of it than others do, thereby limiting sales tax revenue.
The new report provides an argument against relying solely or primarily on sales tax revenue. It concludes that the correlation between income inequality and slower revenue growth “was stronger in the sales tax-reliant states than it was for the income tax-dependent states.” Keep that in mind if Wisconsin lawmakers dust off the idea the Governor floated last year of possibly eliminating the state income tax and replacing that revenue with a huge boost in sales tax revenue.
The Standard and Poor’s report says that its analysis “suggests that through a progressive tax structure, it’s possible to counteract much of the depressing effect inequality has on tax revenue growth rates.” It adds a caution that more progressive tax structures can also increase revenue volatility. Although that’s a relevant consideration, I don’t think it’s an argument against progressive income taxes. Instead it’s a reason for relying on a balanced mix of tax sources, including a progressive income tax, and for setting aside budget reserves during periods of strong revenue growth.
By Jon Peacock