Tax Cuts for the Wealthy Make Inequality Worse

As the rich have gotten richer, U.S. tax policy became more regressive.

Here’s a short test of your value judgments. (There’s no right answer.) If free markets start dishing out increasingly unequal pretax incomes, should the government

  • ignore it,
  • mitigate it by making the tax system more progressive, or
  • exacerbate it by making the tax system less progressive?

The question isn’t hypothetical. And you may be surprised to learn that the U.S. political system has given a clear answer: Exacerbate it.

In September, the U.S. Census Bureau released two important reports containing data on inequality. First came the annual report on poverty and income inequality, based on the Current Population Survey, which showed inequality in 2018 just a hair’s breadth below the all-time high set in 2017. This finding received little coverage.

But the media snapped to attention about two weeks later, when the bureau released different data, this time from the American Community Survey, showing that inequality in 2018 surpassed last year’s high. New records get attention.

Superficially, it sounds as if we have conflicting data: One measure of inequality points up while the other points down. But the differences between the two measures are tiny. By either measure, income inequality in America now stands at, or just a tad below, its all-time high. The essential fact is that inequality has been rising for almost 40 years. Whether the high-water mark came in 2017 or 2018 is immaterial.

What about tax progressivity? Two economists at the University of California, Berkeley, Emmanuel Saez and Gabriel Zucman, just published an important new book, “The Triumph of Injustice: How the Rich Dodge Taxes and How to Make Them Pay.” Perhaps the most stunning finding: “For the first time in the past hundred years, the working class today pays higher tax rates than billionaires.”

Chew on that for a moment. You may remember Warren Buffett bemoaning that he paid a lower average tax rate than his secretary. Apparently, he wasn’t alone.

Reaching this conclusion took a lot of number-crunching. The federal personal income tax, which gets the most attention, is certainly progressive. But Messrs. Saez and Zucman went beyond that measure in their analysis. They took great pains to evaluate all federal, state and local taxes (including the highly regressive Trump tax cuts), and to attribute to shareholders tax payments by corporations. This last adjustment is crucial because most of the ultrarich earn their money from investments, not paychecks.

Messrs. Saez and Zucman also painstakingly traced tax records as far back as possible—in some cases, all the way to 1913, when the 16th Amendment allowed a federal income tax. These efforts found that the average tax rate (taxes as a percentage of income) on the top 0.1% of income earners rose from about 19% in 1913 to an average of 53% between 1930 and 1974. An “Age of Progressivity,” you might call it. After that, however, policy reversed, and the tax rate on the upper 0.1% has now fallen to about 31%.

For the 400 highest earners, whose taxes can be traced back only to 1960, the drop was a veritable implosion: from 56% in 1960 to 23% today. As a consequence, working-class Americans now pay the tax collector a slightly larger share of their incomes (about 25%) than do the richest 400, who earn more than $450 million a year on average. Does that strike you as fair?

How did this happen? Messrs. Saez and Zucman find that the biggest driver was the collapse of the corporate tax as a source of revenue, followed by the near-death of the estate tax. Both were policy choices.

When we juxtapose the data on inequality with the data on taxes, a sad story emerges. Since about 1980, the market has been handing out increasingly unequal rewards in the form of pretax incomes. This trend toward greater inequality isn’t uniquely American—within-country inequality has risen in most advanced market economies. But instead of mitigating that trend by making the tax system more progressive, America’s political system did precisely the opposite. The present Age of Inequality is also an Age of Regressivity.

One can perhaps excuse Ronald Reagan, who couldn’t have known at the time of the 1981 tax cuts that the market would produce more inequality for decades. But by the time of the 2001 and 2003 tax cuts, George W. Bush’s team certainly knew that. And by 2017, when Donald Trump hammered the latest tax regressivity nail into the inequality coffin, virtually every sentient American knew that inequality was at or near a historic high.

Since it’s football season, we should probably call those tax changes “unnecessary roughness.” On the field, the referee would blow the whistle and penalize the culprits 15 yards. But our political system seems to impose no penalty for piling on. That’s just sad.

Mr. Blinder is a professor of economics and public affairs at Princeton University and a former vice chairman of the Federal Reserve.

The Individual Mandate Is Here to Stay

The basic economics of U.S. health care makes that easier said than done. Before the ACA, the U.S. stood out from the international pack on health care in two very unpleasant ways. First, it spent a far larger share of gross domestic product on health care. Second, it was the only advanced industrial nation that left vast swaths of its population uninsured. These two doleful facts remain true, although the fraction of Americans without health insurance fell from 13.3% in 2013 to 8.8% in 2017, according to Commerce Department data.

There are several ways to get more people covered. One is to adopt a system in which the government provides or pays for universal coverage—the British or Canadian model. This won’t happen soon in the U.S., not even as Medicare for All.

A second route, advocated unsuccessfully by President Clinton in 1993, is to mandate that every employer provide health insurance to its workers. This approach might seem natural in the U.S. context because so many workers already receive health insurance that way. But the employer mandate has fatal flaws. It wouldn’t cover the nonworking population, and it would impose heavy burdens on small businesses.

For these and other reasons, many economists in the Clinton administration—including me—favored an individual mandate. But that idea was dead in the water in 1993 because it had been advocated by the Heritage Foundation starting in 1989. It was therefore a “right wing” idea.

There are problems with an individual mandate, too. For one, the high cost of U.S. health insurance means that many low- and moderate-income families cannot afford to buy policies on their own. For another, if for-profit insurance companies are made to lose money by covering people with pre-existing conditions, the government must also force young healthy people, who tend to have limited medical expenses, into the insurance pool.

Fortunately, both problems are easily solved—conceptually, that is, not politically—by mandating that everyone buy a policy and providing subsidies to the needy. Massachusetts legislators understood this in 2006. They also knew they were not writing on a blank slate; many citizens received health insurance through their jobs and didn’t want to lose it. Hence the hybrid system that became known as RomneyCare.

If this short description reminds you of the ACA, it should. The two plans are not identical twins, but there is a family resemblance. In 2010 Democrats didn’t follow in the footsteps of Romney Republicans to make them look good; they designed their plan that way because under the constraints of precedent, the underlying logic practically forces you there.

Keep that in mind: If there ever is a TrumpCare, an unlikely proposition, it’s bound to resemble RomneyCare and ObamaCare—no matter what the president claims.