Tax the Rich

It is difficult to find fault with David Grusky’s contention that taxing the rich is not sufficient to remedy inequality. I applaud his call to expand the range of proposed solutions far beyond tax policy.

Yet he is too harsh on the utility of taxing the rich, and his own proposed solution has some serious problems.

Start with taxing the rich. While it is not adequate on its own—the widening gap between rich and poor, as Grusky points out, has been driven by the rise in pre-tax inequality—it is certainly part of the solution. It would not only make a dent in post-tax inequality but would also raise vitally needed revenue. Especially in today’s political-economic climate, we need that revenue even to think about investing in programs that might lessen pre-tax inequality.

Helping a government starved of revenue is a huge part of what motivates progressives to push for taxing the rich. Few believe that such taxes will get rid of inequality, but they know the government needs money. This is one way to get it. Indeed, any inequality-fighting agenda should incorporate broader tax reform; an appropriately scaled assault on inequality cannot be funded without it. If President Obama is reelected, it would not be surprising to find that tax reform is an important legislative priority for his second term.

Taxing the rich would raise vitally needed revenue.

Grusky’s other objection to taxing the rich is the political challenge it poses, leading to inevitable charges of Eurosocialism and class warfare. True enough. But taxing-and-spending issues are always difficult. Taxing the rich might actually be easier than other efforts in the current political environment. Polls consistently show strong support not only for eliminating the Bush tax cuts for those making more than $250,000 per year, but, more generally, for raising taxes on this group. There’s even stronger support for raising taxes on $1 million-plus earners. An October 2011 Washington Post/ABC poll reported public support for raising taxes on the latter group at 75 percent. Recent polls also show two-to-one support for some version of the Buffett rule, whereby capital gains and dividends are taxed like normal income. Thus Warren Buffet, the world’s third-richest person, would no longer have a lower tax rate than his secretary.

Having mostly set aside tax policy, Grusky’s approach is grounded in the idea of reducing economic rent, returns for an asset above what would be needed to deploy it in a perfectly competitive market. He applies the concept very broadly to include the rising education premium earned by the college-educated, arguing that “institutional bottlenecks” are artificially preventing the supply of college-educated workers from meeting demand, allowing these workers to earn rents. This departs from much economic analysis of the education premium, which treats it in a standard, free-market, supply-and-demand framework. For example, in the influential book The Race Between Education and Technology (2008), Claudia Goldin and Lawrence Katz ascribe the rising education premium since the 1970s to a continued increase in skill-biased technological change and a slowdown in the growth of education supply. But re-framing this issue in terms of rents does not, I think, add much to the basic story told by Goldin, Katz, and other economists.

However, Grusky’s use of rents has a political point. He believes that if the rising education premium, an important driver of increased economic inequality, can be described as rent and therefore anti-competitive, efforts to correct it can be sold as restoring competition to a corrupt marketplace. This will be more politically attractive than tax-based redistribution, he argues, to pragmatic, pro–free enterprise Americans.

Grusky vastly overestimates the likely political effectiveness of his approach, especially given the large scale of the education changes he advocates—“a radical overhaul of our educational system” that would “provide the same educational opportunities to rich and poor children alike” and “provide enough higher education slots to meet the additional demand that such equalization would generate.” This is an ambitious and expensive agenda, which would require considerable government spending and revenue to match. It would face the familiar political difficulties of taxing and spending. That these difficulties could be avoided or even substantially mitigated by presenting the overhaul as a response to market failure is wishful thinking.

Not that I am opposed to the thrust of Grusky’s educational reforms. I see education as a critical area for action to reduce inequality. But let’s not kid ourselves that any particular way of framing such action can avoid a hell of a political fight about the role of government, levels of taxation, and our spending priorities.