April 21, 2013

Barney Frank: Reward rich AND reduce income gap

A widely circulated anecdote has Adlai Stevenson being told that he would get the votes "of all the thinking people."

"That's fine, madam," he reportedly answered, "but I need a majority."

Quips like this may well have contributed to his inability to reach that goal, but he was making a valid point. When you are seeking electoral success, self-satisfaction about the superiority of your position -- intellectual or moral -- is rarely good enough.

If you are serious about achieving your objective, you should make arguments that have a broader appeal. The debate about whether to make a reduction in inequality a public policy goal is an example of this.

Inequality is not a necessary evil; it is a positive good. Rewards based on the value of a worker's output are an incentive.

But inequality can reach a level that is not only unnecessary for efficiency, but harmful. In the past 30 years in America, almost all of our increased wealth has gone to the very top, while incomes of those in the lower and middle levels have been squeezed.

Most advocates of policies to reverse this trend are motivated by their outrage at the unfairness of this. While an emphasis on the moral argument wins the vote of those primarily motivated by compassion, it is unlikely to yield a majority.

Fortunately, there is another argument for reducing the steepness of inequality curve: It will lower the barriers to a full economic recovery.

Defenders of the status quo argue that there is a trade-off between less inequality and greater economic growth. Efforts to alter income distribution by government action, we are told, will diminish incentives that spur productivity. At some level, this will be true.

But in America today, we are far short of that danger point. Policies that shift a moderate amount of wealth from the top 1 percent to the rest of society increase consumption while having no negligible impact on investment.

And consumption is not only the largest component of economic activity, it is the one that has most severely lagged since the crash of 2007-2008. New evidence in support of the pro-growth argument for decreasing inequality is emerging this year.

In December 2012, the president and Congress enacted two very different tax increases.

One -- supported by both parties -- reinstated the full Social Security payroll tax, which had been reduced by 2 percent to fight the recession. This increase affects all people earning up to $113,000 per year. It has no impact on higher incomes, but is a significant increase for low- and middle-income earners.

The other increase -- forced by the Democrats on the Republicans -- raises taxes on incomes above $400,000 per year and on large inheritances.

In the amount of revenue raised, the latter package of increases is far larger. It will produce $624 billion over 10 years. The payroll tax, by contrast, will raise $125 billion in the same period.

But in economic terms, the relative impact of those tax hikes is reversed.

The higher payroll tax paid on incomes up to $113,000 is already concluded by a consensus of economic analysts to be slowing our growth, cutting into spending by the majority of Americans whose entire income is covered.

By contrast, no argument is being made that the increases on income above $400,000 are in any way retarding economic activity. (The sale of luxury automobiles is hitting new highs, and retailers with high-end customers are showing much better sales growth than those who sell less expensive goods.)

The regressive structure of the Social Security payroll tax should be addressed, as I have argued in a previous column.

But the relevant point here is that the $624 billion increase on the wealthiest will marginally reduce income inequality while having no negative macroeconomic effect, while the $125 billion increase on low- and middle-class earners hurts both fairness and economic growth.

This year's experience reinforces the clear lesson of the '90s, when we enjoyed our best economic performance in decades. Neither the increase in taxes on high-level earners enacted in 1993, nor the raise in the minimum wages two years later prevented this -- contrary to the predictions of economic doom from conservative Republicans.

Given the great degree of inequality that still exists, we can take stronger steps to lessen the dysfunctional income gap in our country in ways that help rather than hinder economic growth.

Barney Frank is a former Massachusetts congressman and author of landmark legislation. He was the first member of Congress to come out as a gay man. He lives with his husband in Ogunquit.

 

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