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How do you alleviate economic inequality in America? It's easy to complain about greed and extravagance but much more difficult to come up with practical policies that would make a real difference in the long run.
The default proposal these days is to increase tax rates on top income brackets, starting with an elimination of the Bush tax cuts. That may help a bit, but as you can see from the following graph, the trend toward income concentration did not begin with Bush's presidency, and it would take radical tax increases to get back to 1970s levels. The government would have to strip an additional 30 percent from the incomes of the top ten percent and somehow put that money into everyone else's pockets.
The Top Decile Income Share in the United States, 1917-2007
Leaving aside the unpopularity of such a large tax increase and its economic ramifications, is that even how we really want things work? My ideal progressive society is not one in which the rich bankroll the poor through taxation. It is one in which the differences between rich and poor are far less extreme than they are today.
The real trouble with income tax as a solution to economic inequality is that it addresses the symptom, not the disease. The fundamental problem of economic inequality is not the rich pay too few taxes relative to the rest of us; it's that they earn too much money relative to the rest of us.
So how can we address the disease itself? One solution is to prop up the bottom by raising the minimum wage. To my mind, that's a no-brainer, and I would like to see progressives take up the cause more vigorously, but it only addresses half the problem. If we increased the minimum wage at the same rate that the incomes of the top ten percent have risen over the past forty years, we'd risk severe inflation and/or high unemployment.
To significantly reduce income inequality without such repercussions, we not only have to accelerate wage growth at the bottom; we also have to restrict income growth among at the top, and that is a much trickier feat to pull off.
Let's first distinguish between the two primary income streams of the top ten percent: capital gains and wages. Of these, Berkeley economist Emmanuel Saez blames wages for most of the recent income gains among the top ten percent. That is to say, the rich have been getting richer faster because companies have been aggressively raising the salaries of their top employees.
In that case, one solution could be a pay cap, which would compress income inequality between two federal mandates, a maximum and minimum wage. But leaving aside the unpopularity and legal implications, this approach suffers from a couple of drawbacks. First, economic competition is a valuable motivational tool, particularly at the very top. We don't really want to fill the ranks of CEOs, bankers, and lawyers with clock-punching dead weight. Second, the intense pressure to hire the best will invariably force companies to find alternative ways to compensate their top employees, legally or illegally.
What we really want is not to prohibit companies from overpaying their employees but to discourage them. How do you effectively deter a corporation from taking some action? You have to hit them where it counts: the balance sheet.
I'm about to present half-baked--make that quarter-baked--proposal that has absolutely no chance of becoming law in the foreseeable future. I offer it as a seed for brainstorming, to get us thinking about how we might do things differently.
I propose that we link corporate taxes to corporate salaries. The higher a company pays its employees over a certain threshold, the more it owes the government. This proposal would not necessarily increase overall corporate tax rates, but it would shift more of the burden to companies with highly compensated employees, like investment banks, hedge funds, and law firms, and it would discourage larger corporations from overpaying top executives.
What I'm advocating is essentially a payroll tax, but it's a different kind of payroll tax from the FICA contributions currently deducted from paychecks. It would not be tied to particular social programs, it would not be shared with employees or withheld from paychecks, it would not be capped, it would not be applied below a specified threshold, and it would be progressive rather than proportional.
Unlike pay caps, a progressive payroll tax would not eliminate economic competition at the top; it would just make it more costly to overcompensate employees. If done correctly so as to include all forms of compensation--bonuses, stock options, golden parachutes, and so on--it should add deflationary pressure to the relentless income growth of top-earners.
Such changes might seem semantic to some. After all, what does it matter whether wealthy wage-earners are taxed directly on their salaries or indirectly through their employers? There are a few differences. Wages count against a company's pre-tax earnings, reducing their tax burden; corporate taxes do not. Progressive payroll taxes would not penalize people for working two jobs or having other sources of income. And individuals cannot use personal deductions to offset payroll taxes.
But the primary contrast is psychological. The distinction between "my money" and "the company's money" can make all the difference in the world. It reduces the pain of seeing one's paycheck docked. It assuages the sense of unfairness in which the rich already feel that they pay more than their share. And it undercuts the conservative complaint that progressive taxes punish success.
The psychological difference between appropriating personal income and penalizing companies for overcompensation could make it possible to achieve popular support for progressive tax rates that are more heavily weighted towards the upper brackets. The greater the weight at the top, the larger the deterrent against extreme compensation packages. And that could finally reverse the decades-long trend towards income concentration.
There are plenty of details to work out, of course. For instance, we would need to prevent companies from avoiding taxes by paying portions of their employees' salaries through shell companies and similar evasions. It may also be politically difficult to pass such a plan, since a radical change to corporate taxes would receive aggressive pushback from companies with substantial influence in Washington. But sometimes it's worth exploring crazy quarter-baked ideas just to see where they lead.