Inequality–Before and After Taxes

Here’s some food for thought about how we help the poor in this country.

First off, no matter what Obama says:

Many Americans may find this hard to believe, but the United States already has one of the most progressive tax systems in the developed world, according to several studies …

But, Europeans are right that we don’t actually do that much for our poor:

… According to a study of public finances across the industrial countries in the Organization for Economic Cooperation and Development, we also have one of the least effective governments at combating income inequality. There is one main reason: our tax code does not raise enough money.

That’s weird at first glance, but it does make sense:

This paradox underscores two crucial lessons we could learn from the experience of our peers around the globe. The first is that the government’s success at combating income inequality is determined less by the progressivity of either the tax code or the benefits than by the amount of tax revenue that the government can spend on programs that benefit the middle class and the poor.

The second is that very progressive tax codes are not very effective at raising money. The corollary — suggested by Peter Lindert of the University of California, Davis in his 2004 book “Growing Public” — is that insisting on highly progressive taxes that draw most revenue from the rich may result in more inequality than if we relied on a flatter, more “regressive” tax schedule

Here’s an example:

Consider government aid for families. According to the O.E.C.D. study, our Temporary Assistance for Needy Families is the most progressive program of cash benefits for families among 22 advanced countries, accurately targeted to serve the poor.

But American family cash benefits are the least effective at reducing inequality. The reason is that they are so meager. The entire budget for cash assistance for families in the United States amounts to one-tenth of 1 percent of the nation’s economic output. The average across the O.E.C.D. nations is 11 times bigger.

How do Europeans come up with more tax revenue?

Big-government social democracies, by contrast, rely on flatter taxes to finance their public spending, like gas taxes and value-added taxes on consumption. …

Liberal Democrats have long opposed them because they fall much more heavily on the poor, who spend a larger share of their incomes than the rich. But these taxes have one big positive feature: they are difficult to avoid and produce fewer disincentives to work or invest. That means they can be used to raise much more revenue.

The article makes no explanation of how the American system can be more efficient at actually getting the money it has out to the poor.

What I find most disturbing about our current tax system and its ability to help the poor is summed up in this chart:

The rich are taking in more than they used to, and the poor are taking in less (thus the two lines spreading apart between left and right). No surprise there. And out social programs are not helping out the poor as much as they used to (thus the flatter dark line). The thing is, we’re actually taking more from the rich already, as shown by the percentages. And if the rich are actually bringing in more, that further increases what the government has to play with.

So, where’s it all going if it’s not going to poor people? Duh … middle class people. Way more many people are benefitting from government largesse than they used to.

Read the whole thing, entitled “Combating Inequality May Require Broader Tax” in the November 28 issue of The New York Times.