David R. Henderson  

Tim Smeeding on Inequality

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Lane Kenworthy writes:

Tim Smeeding knows more than virtually anyone about inequality and poverty in the United States and other rich nations. I asked him what he recommends to reduce income inequality. His response:

1. Tax appreciated assets when inherited or transferred inter-vivos.
2. Raise income tax rates on capital income -- capital gains and dividends -- to levels just below labor, e.g. maximum rate at true current marginal tax rate or 30%. And curtail practices of defining earnings as capital income, e.g. "carried interest" provisions.
3. Reduce political rents: close tax loopholes that benefit mainly the wealthy (e.g. cap on deductions for employer-provided health insurance); turn deductions that benefit the richest into credits, many refundable, to benefit lower- and middle-income families; allow drug purchases at "best price" rates, not market rates, for Medicare; get rid of oil and gas exploration tax subsidies; limit and phase out agricultural subsidies.
4. Use tax revenue to improve public infrastructure (including internet).
5. Improve college prep classes and college counseling for students.
6. More and better apprenticeships (get employers involved).
7. Raise the minimum wage to $10 per hour, index it, and enforce labor laws (e.g. on scheduling).
8. Universal child allowance at $2,500 per child, refundable if this is more than income taxes owed, and separate from the EITC.
9. Profit sharing among all long-term (full year or more) employees.


Some critics of inequality seem to care more about reducing inequality than about making workers better off. Tim Smeeding seems to be one of them. Granted that some of his proposals would make workers better off, but some of them would make workers, including low-income workers, worse off.

There are some good proposals here, especially on limiting and phasing out agricultural subsidies. But #1 and #2, while they would probably reduce after-tax inequality, would cause slower growth. The reasoning is that the tax on capital discourages capital formation; with less capital per worker, labor's marginal product is lower than otherwise; and with lower marginal product of labor than otherwise, real wages are lower than otherwise. Professor Smeeding might disagree with this reasoning. But I would be interested in seeing why.

#6 is interesting and could be good. I hope Professor Smeeding realizes that the main way to make this happen is to get government out of the way: reduce the compulsory schooling age from its current 18 in most states to 16 or even 14. And, of course, reduce or abolish the minimum wage so that apprenticeships would be worthwhile for employers to offer. But then I have trouble reconciling #6 with #7.

I won't comment on all of the proposals but I do find #9 perplexing. Granted that in a short space, Professor Smeeding can't lay out all the details, but I wonder how #9 would work. I'm guessing that he would require it by law. That would mean that a lot of workers would, by their own values, be hurt. When a worker's employer is a publicly owned firm, that is, a firm that members of the public can buy shares in, workers, even short-term workers, already have the option of profit sharing. Why require workers who have shown by their behavior that they don't want profit sharing to participate in it? And one can certainly see why workers would not want profit sharing. Their fortunes are already tied up with the fortunes of the firm. A proposal for profit sharing would tie them up even more and make their investments even less diversified.

Also, notice that in his list of 9 items, there is no mention of getting rid of, or at least cutting back, the occupational licensing regulations that Morris Kleiner and Alan Krueger have written about.

HT to Mark Thoma.


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COMMENTS (21 to date)
Urstoff writes:

Are there any studies on the incidence of various kinds of taxes on capital gains?

MG writes:

A way to reconcile his desire for something like 9, and your sensibe critique of it, is a Chilean type social security scheme. Workers can then partake into a diversified profit-sharing plan -- economy or worldwide. Sort of think what Smeeding would not approve.

Hederson: [edited] Tim Smeeding knows more than virtually anyone about inequality and poverty.

He would have to. To know the proper distribution of wealth requires a godlike insight, considering that wealth is not "distributed", but created by people of vastly different abilities and insights.

We should want more inequality achieved through ability, practice, and production. We suffer because people with special abilities are hindered by envy and political greed. The exception is sports and acting, where inequality and great wealth are celebrated.

Smeeding's laundry list above suffers from some blatently ignorant or incorrect wishes. This, by an expert who has supposedly considered all of these suggestions and has supposedly evaluated each for its ability to help the poor without injuring others. That should include not injuring the rich, but probably doesn't.

Consider #1: Tax appreciated assets when inherited or transferred inter-vivos.

Inheritance IS TAXED already; these are called estate taxes. The inheritance is not then taxed again in the hands of the inherators. Non-cash assets have a stepped-up basis, meaning that additional appreciation will be taxed when the asset is sold. The value inherited is not taxed again. This is rational.

Even so, taxing businesses and farms upon the death of an owner often requires selling those assets, going against the reasonable judgment that the government should wait for an asset to be sold before taking its cut of the cash which becomes available for dividing up.

"Transferred inter-vivos" is nicely fancy. There are already gift taxes above some yearly and lifetime exclusions. So, what could Mr. Smeeding possibly want in addition?

Motto: I care about all mankind, so I have devoted my life to considering how much of your stuff I can take, and what explanations will distinguish me from a bank robber. Merely give to me as much of your stuff as I can justify with slogans, and I will greatly eliminate poverty.

Mr. Henderson has trouble reconciling #6 with #7. This is polite for "(These contradict each other)". That is because these 10 points are a laundry list of grasping, political desire. Consistency is not required above the task of taking the cash.

This is not the list of a thoughtful person.

Sorry, the statement "Tim Smeeding knows more than virtually anyone about inequality and poverty " is by Lane Kenworthy. I find no fault with Mr. Henderson's comments.

Ricardo Cruz writes:

@Andrew writes "We should want more inequality achieved through ability, practice, and production."

Inequality does not only have to do with ability or consciousness. Also worth noticing is that human utility functions are different. Some people do not respond as strongly to materialist incentives and prefer to slack off or pursuit other things in life. These people should not be denied opportunities because one deems those jobs to be low-paying or deny education pursuits whose compensation is worse.

Jack PQ writes:

Aside from proposals that do not withstand the test of good economic reasoning, I would like to add that when one's proposal depends on "perfect implementation", "closing loopholes", and avoiding unintended consequences, it is pie in the sky. We live in the real world, where loopholes cannot be closed for long, where there are unintended consequences, where policy is never implemented exactly as we would wish (e.g., the poor may not hear about certain programs they are eligible for, or may not be able to fill out the paperwork because they move from one address to another too soon, etc.).

Profit-sharing has always been intriguing, and Harvard economist Marty Weitzman wrote a book about it, but again simple economics tells you that most workers would prefer a fixed wage to a risky income stream (profits). This is empirically confirmed as Prof. Henderson explains that any worker could create home-made profit-sharing by spending some wages to buy stock shares.

Charlie writes:

"To know the proper distribution of wealth requires a godlike insight, considering that wealth is not "distributed", but created by people of vastly different abilities and insights."

Distribution is a mathematical term:

2 a :the position, arrangement, or frequency of occurrence (as of the members of a group) over an area or throughout a space or unit of time


Google "normal distribution" or "uniform distribution" it has nothing to do with 'giving out.'

gene marsh writes:

Mr. Henderson. claiming that any policy intended to help the poor actually hurts the poor is an old reactionary thesis you deploy constantly. A naive reader would never guess that youre fealty is to big business and the wealthy because you never directly admit it. When you object to the minimum wage you do so bc plentiful cheap labor is your objective. And that is all well and good~ thats where your sympathies lie.
But pretending to care about a demographic you yourself admit youve never spoken to- minimum wage workers~ is transparent concern trolling. If you really believed you and not those who represent workers had there best interests in mind then you would be morally obligated to take your message directly to those unfortunates who are being tricked by liberal politicians into seeing your and their interests as being unaligned.
For 200 years conservatives have made these insincere arguments as outlined in hirschmans rhetoric and reaction.
Every rightwing talk show host in america repeats your argument~the perversity thesis~ when these issues come up.
There is a gleeful cynicism to all this as you toy with issues that others must take seriously. And no, your standard cool guy alibis, supporting open borders\legal drugs\looser licensing do not mask your allegiance to corporatism since none threaten it.

khodge writes:

Sorry, this sounds more like a laundry list of left-leaning economists than the start of a serious discussion.

Starting with the first three items, he seems to be saying (like Piketty) that most of the wealth is "old wealth." Just one contra example: there was no Silicon Valley 40 years ago.

Of course, all of his suggestions put the government firmly in charge of regulating wealth. The only good thing that can come of this is that forty years from now when they reduce the maximum income tax from 90% to 35%, the economy will experience a major boom.

john hare writes:

@Gene Marsh,
I have spent considerable time talking to, and attempting to work minimum wage people. As an employer, I can tell you that minimum wage people are often not worth even that, which is why they are frequently unemployed. My people make two to three times the legal minimum wage because they are worth it and make me money.

Supervision costs of minimum wage workers is part of the hidden costs of employing them. If I have a $20.00 an hour person attempting to work three MWW, I have a cost of $42.00 an hour plus insurance, taxes and other overhead. The $20.00 an hour supervisor will get very little work done while trying to get performance and quality control from the MWWs. Work him alone, and performance will be more than 2/3rds the performance of the crew of four with a tiny fraction of the hassle. Two $20.00 an hour employees will vastly outperform the larger crew with the MWWs in quality and quality for less money and hassle.

If a non-skilled person with capabilities starts with my company, they will be making 50% more than minimum in a month or be unemployed. I am sick of people with no real world experience trying to tell me that raising minimum wage will motivate the unmotivated. You spend a few decades trying to work people that are unreliable, high maintenance, and low or even negative performance and you might understand.

ThomasH writes:

A good start but it could be improved to make it more market-friendly.

1 Tax appreciated assets when inherited or transferred inter-vivos.

If we stick with income taxation – progressive consumption taxation is better – this is OK provided that a) the gains are indexed and b) the rate applied is as if the gain were spread over the holding period.

2. Raise income tax rates on capital income -- capital gains and dividends -- to levels just below labor, e.g. maximum rate at true current marginal tax rate or 30%. And curtail practices of defining earnings as capital income, e.g. "carried interest" provisions.

Again, progressive consumption taxes are better (but probably even less acceptable to political conservatives than income taxes), taxing capital income at ordinary rates is OK if capital gains are adjusted as above.

3. Reduce political rents: close tax loopholes that benefit mainly the wealthy (e.g. cap on deductions for employer-provided health insurance); turn deductions that benefit the richest into credits, many refundable, to benefit lower- and middle-income families; allow drug purchases at "best price" rates, not market rates, for Medicare; get rid of oil and gas exploration tax subsidies; limit and phase out agricultural subsidies.

The best way to eliminate most loopholes is by abolishing the corporate income tax and imputing the income to the owners where consumption would be taxed progressively. Eliminate all the subsidies for employer “provided” health insurance (it just give employers an excuse to meddle Hobby Lobby style in the health insurance coverage of their employees) and use the revenues to increase tax credits for individual purchase of insurance. All personal deductions should become potentially refundable partial tax credits.

4. Use tax revenue to improve public infrastructure (including internet).

Yes, but both project choice and timing should be dictated by cost benefit analysis. (Timing would probably imply much higher deficit financed investments during recessions, see 11 below).

5. Improve college prep classes and college counseling for students.

If cost benefit analysis shows it to be effective.

6. More and better apprenticeships (get employers involved).

If cost benefit analysis shows it to be effective.

7. Raise the minimum wage to $10 per hour, index it, and enforce labor laws (e.g. on scheduling).

Better raise the EITC to an equivalent level instead of raising minimum wages

8. Universal child allowance at $2,500 per child, refundable if this is more than income taxes owed, and separate from the EITC.

Perhaps greater and a separate credit for pre-school. Even more radical would be to make it high enough to allow private purchase of education as Professor Henderson implicitly suggests.

9. Profit sharing among all long-term (full year or more) employees.

Not a good idea for the reasons Professor Henderson has outlined but a partial tax credit (not deduction) for contributions to retirement savings accounts would be a good alternative.

10. Agree with turning occupational licensing into certifications. More favorable immigration treatment for persons entering certified lines of work.

11 [Mine] Better macroeconomic management. Fed targeting of NGDP (or at least the price level, not inflation). Greater automaticity (tied to the unemployment rate) in transfer programs – Medicare, unemployment insurance, SNAP. Suspension of payroll taxation of the first X dollars of wage income. Timing of infrastructure investment driven by Federal borrowing costs with re-lending to states and municipalities if necessary.

12 [Mine] Convert environmental regulations and “clean” energy subsidies into taxation of the underlying externality, including on CO2 emissions.

13. [Mine] Tax urban congestion with vehicle proximity technology.

Tom West writes:

Some critics of inequality seem to care more about reducing inequality than about making workers better off.

This is a great cut line, but the truth is that in many cases inequality *does* matter in and of itself.

A simple thought experiment: take a well functioning team and publicly triple the salary of one employee for no reason. Does anyone really think that this *wouldn't* damage the happiness and effectiveness of the team?

There are *lots* of factors that go into utility functions. But simple inequality is a factor that goes into any such function that models factors of human happiness.

David R. Henderson writes:

@gene marsh,
If you really believed you and not those who represent workers had there [sic] best interests in mind then you would be morally obligated to take your message directly to those unfortunates who are being tricked by liberal politicians into seeing your and their interests as being unaligned.
I don’t agree that I’m morally obligated, but nevertheless it sounds like a good idea. I take it that you are in touch with minimum wage workers and can line up a gig for me?
By the way, I don’t know how many minimum wage workers were in the audience for my speech to Occupy Monterey, but I did get a number of things about free markets across to audiences that one might expect to be hostile. There was one hostile woman, Luana Conley, from the Green Party who tried to shout me down. But, other than her and one other guy whose name I don’t know, many of the audience were quite receptive.
See here, here, here, and here for my reports on the event.

ThomasH writes:

@khodge

The only good thing that can come of this is that forty years from now when they reduce the maximum income tax from 90% to 35%, the economy will experience a major boom.

That's not what happened the last time that happened.

David R. Henderson writes:

@ThomasH,
@khodge
The only good thing that can come of this is that forty years from now when they reduce the maximum income tax from 90% to 35%, the economy will experience a major boom.
That's not what happened the last time that happened.

There was never a time when that happened. The top tax rate did fall from 91% in 1963 to 77% in 1964, and to 70% in 1965, and we did get a boom starting in about 1965. But, of course, a drop from 91 to 70 is not a drop from 90 or 91 to 35.
Then the top tax rate fell from 70% in 1981 to 50% in 1982 and we did get a boom starting in late 1982.
Then the top tax rate fell from 50% in 1986 to 38.5% in 1987 and 28% in 1988 and we got good growth, though probably not what one would consider a boom.

sourcreamus writes:

By #9 I imagine that he is wanting companies to be forced to do this without lowering any other type of compensation. Of course in the real world, upping one type of compensation would mean lowering other types. Since most people would rather have money now than a share of profits, this would be bad for most workers in practicality. If it were possible to do so without lowering other types of compensation it would make workers better off, but that is not the world we live in.

ColoComment writes:

I don't understand the apparent fascination with refundable tax credits. It seems to me that the opportunity to "make" money from an income tax filing is an incentive for fraud/abuse.

Floccina writes:

ThomasH makes a set of proposals that I think a knowledgeable person with the stated goals of a Democrat would make. So why do so few Democrats make such proposals?

@Floccina

Why didn't the Dems implement all of these things and more when they controlled the entire government?

Because, these destroy the production of wealth by burdening the people who produce wealth.

The Dems have many wealthy supporters who want to collect wealth for themselves. They push issues which are popular advertisements, but which don't hurt themselves much. It is shame that some must be injured by these policies to keep the Dems in power.

The most recent and hilarious evidence for this is the announcement by California unions that unionized workers should be excluded from the minimum wage. Yes, the unions want the freedom to negotiate LESS for their workers. The unions worked hard to pass the $15 minimum, but they want out for themselves. The unions want the largest number of unionized and dues-paying workers, and they understand that their membership will shrink under that minimum wage.

If the unions could have their way, the minimum wage would be $25, the unions would be exempt, and of course all low-wage California workers would join unions, because business couldn't pay that minimum.

Democrat and government motto: Pass onerous regulation, then exempt ourselves. A beautiful flow of power results.

OH Anarcho-Capitalist writes:

The staggering amount of economic illiteracy on the left is astounding.

If Progressives were the least bit interested in truly exacting the maximum amount of wealth from the productive to fund their petty tyrannies, they could be expected to be the masters of such knowledge, and presumably would be the most pro-growth group in the country. Far better to extract 20% of $1M than 40% of $400k.

I believe they are driven instead by quasi-religious beliefs that subsume education, logic and facts to utopianism. They are truly the anti-science crowd...

michael Moran writes:

I am a tax lawyer, but I will forgo the comments on the tax system other than to say high income taxpayers currently pay most of the income taxes and really there is not much juice left in closing loopholes.

Instead, a broader point. Reducing income inequality involves increasing taxes on high income taxpayers and/or income transfers to low income taxpayer. Both reduce the incentive to work, and the incentive to work in the most economically efficient manner (i.,e., transfers to low income taxpayer may cause them to work less productively in the underground economy, high tax rates encourage economically inefficient tax shelters). As a result, both always reduce economic growth (which involves working more or working more efficiently).

The other supposed policies, such as education or counseling, are almost always ineffective with respect to there stated goal.

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