Economy / Fiscal policy / Healthcare / Politics / Tax

Occupy entitlements! And the tax code!

By Will Portman

The Occupy movement has brought income inequality to the forefront of the national political discussion over the past year, even if both the movement and the issue have faded in recent months.

Occupy protestors are concerned about the growing wealth gap in the U.S., pointing to studies like the recent Congressional Budget Office report on income inequality that shows that between 1979 and 2007, income grew by 275% for the top 1% of households; 65% for the next 19%; just under 40% for the next 60%; and 18% for the bottom 20%.

Many of the protestors, including a few I talked to at an Occupy DC encampment on McPherson Square last week, think the federal government ought to do more to even out wealth distribution in the U.S., specifically, by increasing taxes on the rich.

But the more prudent course of action for the government is not to force greater equality of results by redistributing wealth, but rather to facilitate greater equality of opportunity by doing less of what it’s currently doing to perpetuate existing levels of wealth concentration: specifically, by cutting back on the billions of dollars it spends each year on the wealthy.

The main problem with the Occupiers’ proposal to increase taxes on the rich is that it would impede economic growth. Raising corporate and/or individual income tax rates would make the U.S. even less competitive in the global economy as well as undermine entrepreneurial incentive, so the strategy would be counterproductive unless you’re satisfied with a smaller GDP so long as everyone gets a more equally sized portion of it. (And there are probably people — maybe even a few down at McPherson Square! — who would be satisfied with this outcome, but I believe the idea that there’s a trade-off between a robust economy and more even wealth distribution is a false choice.)

There is a set of policies that would increase economic mobility without inhibiting economic growth all while reducing the deficit — in other words, common ground for Occupiers and fiscal conservatives.

Policy #1: means-test Social Security

Reduce benefits for wealthy seniors. Reducing government benefits for those who don’t need them is common sense, and would help ensure the long-term solvency of Social Security for those who depend on it.

Policy #2: means-test Medicare

Require wealthier seniors to pay higher premiums and co-pays. Reducing health care subsidies for those who don’t need them is common sense as well, and doing so would help control the runaway growth of Medicare spending, which is projected to double as a percent of GDP over the next couple of decades as health care costs continue to rise and the Baby Boomer generation reaches retirement age.

Policy #3: reform the tax code

The federal tax code is ridiculously long (over 70,000 pages with relevant IRS rulings included) and riddled with exemptions, credits, and loopholes for special interests. Simplifying the tax code and getting rid of preferential treatment would eliminate billions of dollars in tax breaks to various industries and corporations, both leveling the playing field and reducing the tens of billions of dollars American companies spend each year on tax code compliance.

Policy #4: end corporate subsidies

The federal government doles out billions of dollars each year to companies like General Electric, Boeing, and IBM, which are all making massive profits. This doesn’t make a whole lot of sense, especially given the country’s fiscal situation, and smacks of crony capitalism.

Conclusion:

Cutting unnecessary government spending on the rich would reduce income inequality and reduce the deficit, but without the dampening economic effect of raising taxes on the wealthy. It may be the case that Occupy protestors have more in common with conservative deficit hawks than either group had thought (or perhaps would like to admit!).

Sources:

http://cbo.gov/publication/42729

http://www.washingtonpost.com/business/economy/medicare-spending-growth-rising-slower-but-enrollment-will-rise/2011/12/15/gIQATcIMCP_story.html

http://globalpublicsquare.blogs.cnn.com/2012/03/24/zakaria-america-needs-a-2-page-tax-code/

http://www.realclearpolitics.com/articles/2011/03/23/corporate_welfare_109316.html

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