Even in what might appear as seemingly the most mundane of matters like tax policy, moral implications and justifications lurk. Take the policy of reducing taxes for the rich and keeping them low; for example, income taxes, corporate taxes, capital gain taxes, or estate taxes. The income tax rate for the top earners, for example, dropped 50% in the US from what it was, say, in the 60’s. Precipitous drops occurred in the US and Great Britain under the leadership of Reagan and Thatcher.
The moral justification for this was founded on the idea that adopting this policy would result in a more robust economy and would monetarily benefit everyone, including low-income people. What could be more moral especially if one adds that the poor are benefited more by this policy than they would be by any other alternative policy? Who can argue with such a moral outlook.
This justification continues to be promulgated today. Indeed, supporters have had to double down on the justification in light of sharp increases in income and wealth inequality. Politicians of a certain stamp now argue that such inequality is not a problem, moral or otherwise, because the important thing is that economic mobility be maintained and everyone have an opportunity to better their economic status. As long as opportunity for economic betterment exists, the additional moral argument in defense of the policy of reduced taxes for the wealthy is that meritocracy triumphs. Everyone gets what they deserve. What could be moral than that?
The Heritage Society provides a typical argument in support of this thesis (“Defending the Dream: Why Income Inequality Doesn’t Threaten Opportunity,” 2012):
“Today, on the Left and on the Right, everyone talks about rebuilding, saving, restoring, defending, or rescuing an American Dream that is slipping, fading, eroding, or vanishing.
“The loudest voices, all coming from the Left, fulminate against the top 1 percent of earners and blame an unfair system that allows the rich to line their pockets, leaves the poor in the lurch, and generates spectacular income disparities. To protect the American Dream, these critics call for greater government involvement to make things more equal and ensure that everyone gets their ‘fair share.’
“This gets both the problem and its solution all wrong. Free-market economics is not about dividing up a dwindling pie, but expanding the pie to serve everyone. Those who succeed do not do so at the expense of others.”
In comparing the American Dream vs the Liberal Dream, the Heritage Society claims the primary focus of the former is individual effort and that of the latter, government assistance, which ultimately harkens back to the idea of meritocracy—you get what you deserve.
In Part I of this post, I try to answer the following question: Does reduction of taxes for the very wealthy create the promised robust economic growth that secures a better life for the poor. In other words, does it fulfill its moral justification? In Part II, I will analyze whether this policy does, in fact, contribute to income inequality; and if so, is it morally acceptable if at the same time economic opportunity and mobility are maintained?
I find it frustrating trying to find reliable answers to such questions that eschew political soundbites or involve analysis that is designed for specialists in economics. If you are like me, you want analyses and statistics which do not obfuscate and which laypersons eager to learn can trust to lead to truthful answers to questions posed. In what follows, I try to make a good-faith effort to provide reliable data and understandable analysis for myself and any others who join me, without getting bogged down in abstractions, too many details, or endless statistical charts that are rarely comparing apples to apples so to speak; but my hope is that readers of these posts will supplement and correct my attempt as necessary. The issues are important.
Based on my research and reading of the data, I have to say that I found the answer to my first question is a no: those on the bottom 40% of income-earners or households have not sustained significant improvement to their economic well-being over the course of decades as a result of tax reductions to the rich. In drawing that conclusion, I look at trends in poverty rates, wages, and wealth (assets). After that I will address question of whether the policy does, in fact, generate economic growth.
A review of poverty rates does reveal that they did decline from the 1960’s to 2014 (25% to 16%), if one uses the measure of expenses designed in the 60’s, which is only adjusted for inflation but omits household budget realities like the jump in housing and health care costs and declines in other costs. Using an alternative measure (more accurate in today’s circumstances), poverty rates showed no decrease. However, when the alternative measure is supplemented to include income from all tax and cash and non-cash benefits (safety net programs) the low-income are qualified for (e.g., tax credits, housing subsidies, school lunches, SNAP), the poverty rate shows a drop similar to the original measure, and ends up at 16%. (Statistics from “Poverty in the United States: 50-Year Trends and Safety Net Impacts,” U.S. Department of Health and Human Services, 2016) It is further true that actual poverty rates have declined each year since 2014 as the economy has emerged from the Great Recession occasioned by subprime mortgage crisis, and in 2019 stood at 10.5%, a figure that is expected to start increasing again as a result of the effects of COVID-19.
However, and this is important, without such benefits and safety-net programs, the poverty rate in 2014 would have been 28%, rather than 16%. The impact of safety-net programs is far greater now than in the 60’s. And yet, how often we hear aspersions, like those from the Heritage Society quoted above, cast on such programs and their recipients, as if our economy was such that poverty or near-poverty would disappear if the poor just exercised initiative and effort. In any case, to bring this part of the analysis up to date, the actual poverty rates have declined each year since 2014 as the economy emerged slowly from the Great Recession of 2007 – 9, and in 2019 it stood at 10.5%. Since recovery was well underway, it will be very difficult to pinpoint what if any direct effect the 2017 tax cuts for the rich had on the declining poverty rates. In any case, the rate is expected to start increasing again as a result of the effects of COVID-19, although COVID relief legislation will help offset that.
Of the 37 nations in the Organization for Economic Cooperation and Development (OCED), the group of nations with developed economies, the US in 2019 had the third-highest percentage of low-wage workers, with nearly one in four workers defined as low-wage.
The poverty rate is just one lens to look through in evaluating the question of whether the policy of tax reduction for the wealthy improved the status of lower income individuals or households. Let us look at inflation-adjusted wage trends as documented in this same study. Median salaries for men remained virtually the same from 1975 to 2014. Women’s salaries, on the other hand, increased significantly in light of how poorly they were paid in 1975, allowing median salaries of all full-time workers to increase overall by $3,000. Who would ever find this a substantial increase? Moreover, according to statistics from the Economic Policy Institute, real wages (excluding benefits) from 1979 to 2019 increased for workers at the 10th percentile by 6.6%, at 50th percentile by 8.8%, and at the 90th percentile by 41%. Increases for the lowest percentile are practically non-existent considering the low level of wages that are at issue. Even at the 50th percentile, the increase marks no dramatic advance in economic well-being. The lower one’s salary the bigger percent increase one needs to be economically better off in any meaningful sense.
Moreover, of the 37 nations in the Organization for Economic Cooperation and Development (OCED), the group of nations with developed economies, the US in 2019 had the third-highest percentage of low-wage workers, with nearly one in four workers defined as low-wage. (This OECD study defines low-wage as earning less than two-thirds of a nation’s median wage.) A November 2019 report from the Metropolitan Policy Program at Brookings shows that 53 million Americans—44% of all workers aged 18-64—have low-wage jobs. This significant portion of the nation’s labor force is earning median hourly wages of $10.22 and median annual earnings of $17,950. If indeed one is trying to raise a family on this salary with no other wage earner in it, the household will fall below the poverty line. Policies regarding minimum wage rate may also contribute to this issue: Today’s federal minimum wage is $7.25 an hour. Adjusted for inflation, the minimum wage is down 18% since it was last raised in 2009, and down over 30%, after inflation, since 1968, during Lyndon Johnson’s Great Society years.
Looking at matters from the point of view of wealth (assets), rather than income, does not provide a cheerier picture. The bottom 10th percentile of families in 1963 showed no assets; in 2016 their “assets’ were a negative $1,000 (Urban Institute). Assets such as savings, real estate, and so on, are the resources that allow individuals and families to weather emergencies and economic downturns, and ideally provide a way to improve their economic status. In another study using 2016 dollars, the average wealth of the poorest 40 percent was found to have declined from $6,900 in 1983 to -$8,900 in 2013, a year in which the effects of the collapse in housing values were still being dramatically felt (http://www.nber.org/papers/w24085, National Bureau of Economic Research). Debt from college loans is significantly exacerbating the problem of assets.
In my research I have seen nothing in the statistics that would lend support to the idea that the policy of major reductions of taxes on the wealthy have led to a robust economic growth in which the bottom or the bottom-two income quintiles have sustained significant gains. The small gains that were possibly generated by the policy do not provide moral justification for the policy. To suggest otherwise seems to me intellectually dishonest and perhaps even callous.
In a 2019 report on the economic well-being of U.S. households, the Federal Reserve Bank determined that nearly 40 percent of U.S. adults would not be able to cover a $400 emergency with cash, savings or a credit card charge that they could quickly pay off. Various studies have shown that between 50% and 80% of households live paycheck to paycheck, and this strikes me as a risky economic situation. On the other hand, it is admittedly a tricky statistic because obviously some of these households have significant income and could save and invest if they opted for a more modest lifestyle. Yet, modern economic growth is pinned to consumption, including consumption by those on the bottom two income quintiles. Buy, buy, buy is the American mantra. It is no accident that governmental COVID-relief money to individuals making less than a certain amount is called a stimulus payment, whose purpose is not to get people to save for emergencies, but to pay their bills, spend, and shore up the economy.
In my research I have seen nothing in the statistics that would lend support to the idea that the policy of major reductions of taxes on the wealthy have led to a robust economic growth in which the bottom or the bottom-two income quintiles have sustained significant gains. The small gains that were possibly generated by the policy do not provide moral justification for the policy. To suggest otherwise seems to me intellectually dishonest and perhaps even callous.
While the policy has failed in that way, we can still ask whether, in fact, reduced taxes on the wealthy stimulate economic growth and employment. Conclusions about this have been more subject to disagreement among economists. What is clear from the disagreements is that the original assumption behind the policy is far from an established fact and thereby not a secure assumption for even maintaining the tax policy in question.
However, a major recent study published in 2020 has tried to address the shortcomings of previous analyses to arrive at a more certain conclusion about this matter (“The Economic Consequences of Major Tax Cuts for the Rich,” research conducted by David Hope and Julian Limberg for an institute at the London School of Economics). This technical study involved analysis of 18 OECD developed countries (including the US and Great Britain), measuring what effect major tax reductions for the rich have had on the economy. One special feature of the study involved looking at data not just in the immediate five years after the reduction, but also at the five years before to make sure other trends were not affecting the data.
Their research led to the conclusion that the policy of reducing taxes on the wealthy had virtually zero effect over the next five years on economic growth or employment in thee 18 countries studied. If that analysis holds up, the policy in question lacks even economic justification. And, as we saw, it definitely cannot be said to be morally justified on grounds that it has brought significant improvement to everyone’s economic status.
In the next post (Part II), we will turn to a discussion of what this policy has meant for income inequality, opportunity, and meritocracy.