Tax Reform is the Only Way to Address Income Inequality

1st, let me say I do not support a marginal tax rate (State & Federal) above 46%, which is where it is now in most high tax states.  (NY's 7% + (93% * 39%) + 1.5%) = 45%)  You need to keep more than 50% of your marginal wages to feel good about paying the 46% to the government.

So, if you are going to do something about Income Inequality it has to be through tax reform.  Tax Reform is also the only way to address unfair taking advantage of the tax system to avoid paying one's fair share schemes.  I am, of course, speaking about the so-called carried interest that allows hedge fund labor to be paid current income as "capital gains".   So these master's of the universe pay 15% or 20% while other forms of wages get taxed as high as 39% by the I.R.S.

I go down this path because Robert Solow wrote a very interesting piece in the current issue of The New Republic (you have to be a subscriber to read it, there are no freebies for magazine articles on-line) reviewing and adding to the work of Thomas Piketty on the inequality of wealth in the world over time.

This inequality has and will continue to increase after being reduced by 2 World Wars and the Depression.  Notice, the book focuses on inequality of wealth by economic classes and notes how normal and inevitable the existence of this inequality will be.  The real question is how should society view such inequality and put parameters around it.

The goal is not to eliminate it, but to bring about a fairness in funding society and incentives that help the most people achieve economic security.  A feeling that there was a lack of fairness in TARP and a sense of economic insecurity is what lays behind the founding of the Tea Party.

There can be no income for the masses without the capital of the upper class.  So confiscating this capital is not a path to be pursued.  The issue is how to create a system that is globally competitive and rewards effort.

Grover Norquist and his anti-every tax crowd are just trying to protect the existing wealthy in some application of the Ann Rand theories, which, not surprisingly, have been bastardized by the current GOP.  She believed in ultra-capitalism, but also was a supporter of women's rights.

So, what would tax reform look like.

1st, equalize the tax treatment of health insurance for individuals and company provided health insurance to incentivize the cessation of employer provided health insurance.  That would help equalize the cost of labor in the U.S. with the rest of the world and promote the return of manufacturing jobs to the U.S.

2nd, reduce the burden on income tax to pay for government by instituting a tax on consumption.  That would also encourage savings once income has exceeded a base level of costs.  Such a base level of costs, might also have a very low income tax rate.

3rd, make corporate tax rates real.  Right now various tax incentives offset so much tax that corporations pay little and substantial earnings get frozen overseas and not repatriated for investment in US assets or distribution to shareholders.  This is perverse.  Corporate taxation has lost all its rationality.

4th, Over 50% of the population makes too little to save very much.  They no longer get pensions other than Social Security.  A low tax rate on savings does not provide them with any incentive to save.  The top 10% of the U.S. population controls 70% of all capital.  They also earn 11.6% of all the income.  However, in calculating that, I started with the known fact that the top 1% get 10% of all the income.  So, the rest of the the top 10% (91st to 99%) get only about 10% in total of the income received by the top 1%.  That is a stunning inequality even at the top, but we are a capitalistic society so we should not be bothered by that distribution.  That is how society values labor.  What we should be concerned about is fairness in supporting the government and what policies we are encouraging.

These super income people do not need encouragement to save.  Our subsidizing them through lower taxes on capital gains and dividends are not encouraging anything that creates jobs in mega corporations.  We need a tax reform that limits capital gains and dividend preferential tax rates to those who have income and whose investments are in smaller businesses (perhaps limited to non-C Corporation entities) which employ people.  The bottom line of Piketty and Solow's work is we need a tax reform that reduces the preferential tax rates aimed at wealth creation and owned by the wealthy.  Keeping them for the less wealthy would encourage and provide the means for the less wealthy to save.

5th, the next 50 years will not enjoy the growth of the last 50 years.  There is too much capital, there is no low cost labor shock to come from another well educated economy, and productivity gains are now reducing wage gains and are going completely to capital.  The benefits of all this flow completely to the wealthy.  They need to pay their fair share so tax rates on the less wealthy can be reduced to allow the less wealthy to save for retirement, which is now one big unfunded mess as pension plans have been eliminated.  That is not simply a problem for the poor, it is a problem for much of the middle class and might encompass as much as the 70% of the population that earns less than $85,000 a year, which is not much for a family in an urban area.

6th, raise the minimum wage to a be a livable wage.  No one working 50 hours a week should be in poverty, but that will not help the millions of people who make substantially more than the minimum wage but are not saving for retirement because too much middle income money goes for taxes when the wealthy get all the tax subsidies.

Tax reform is the only way to address this.  I am sorry Dave Camp (R - Michigan) is retiring because I think he gets it.  Most politicians do not.