Economic Policy Institute
June 9, 2016
Progressive redistribution without guilt
By Josh Bivens
What this report finds:
Boosting income growth for the bottom 90 percent requires a policy agenda that explicitly aims to halt or reverse the rise in inequality in the United States in recent decades. The economic evidence shows no generalizable relationship between rising inequality and faster growth. This is important good news. It means that an agenda based on progressive redistribution can unambiguously raise living standards for the bottom 90 percent and even likely be better for overall growth than the agenda promoted by those who are opposed to strong efforts to check rising inequality and instead want to focus solely on spurring overall growth.
Why this matters:
The lack of a general relationship between inequality and growth means that specifics matter in policy debates. And the specifics of the modern "growth only" agenda will fail. Policies such as cutting top tax rates, deregulating industries, and signing more trade agreements will both fail to appreciably boost growth rates and continue to send a disproportionate share of income gains to the top 10 and 1 percents. The "growth only" agenda has already been tried, and the results have been slower overall growth and sluggish income gains for the vast majority in recent decades.
How we can fix the problem:
Income redistribution over the last few decades has been a zero-sum process, with gains at the top essentially coming straight out of the pockets of the bottom 90 percent of Americans. This zero-sum dynamic means that intelligent policies—including but going way beyond smarter and fairer taxing and spending—can convert these lost potential gains for the bottom and middle into actual income increases without harming overall economic growth. We should:
* Use the levers of macroeconomic policy (monetary, fiscal, and exchange-rate policy) to target genuine full employment.
* Make investments that markets are not making—in early childhood education, infrastructure, school construction, energy efficiency, and public health care.
* Strengthen antitrust regulations and look for other opportunities to introduce competition to private markets, such as public options for health insurance and retirement savings.
* Reregulate many activities of the financial sector to squeeze out the activities that don't enhance productivity or create efficiency but simply enrich well-placed actors within finance. A financial transactions tax is the clearest example of a policy that can stop this income skimming.
* Enact climate-change mitigation measures—realizing that policies beyond simply increasing the market price of greenhouse gas emissions can play large and useful roles.
* Strengthen regulations and institutions that help shift bargaining leverage from capital-owners and corporate managers to low- and middle-income workers. Key examples include higher minimum wages and labor law reform that allows willing workers to join unions and bargain collectively.
Comment by Don McCanne
Health care costs for the typical working family of four now average over $25,000 (2016 Milliman Medical Index). The only way low- and middle-income individuals and families can afford health care is through progressive redistribution. How are we doing?
With Medicaid we are doing quite well. The majority of lower-income individuals in states that participate in the ACA Medicaid expansion have their health care paid for through taxes, especially progressive income taxes. Wealthier individuals pay a higher percentage of income in taxes than do lower income individuals, and the lowest income individuals pay no income taxes at all. That certainly represents progressive redistribution as far as low-income individuals are concerned, though not for those with average incomes.
Medicare is funded primarily by general revenues which tend to be progressive, and by payroll taxes which tend to be proportional to income and thus not as progressive as income taxes since the rates do not increase with income. The exception is that individuals with incomes over $200,000 do pay an additional 0.9% Medicare tax on wages, making it more progressive than it had been before ACA. However, most of the income of the wealthy is not from salaries but rather from tax-advantaged sources, thus the impact is not as great on them as it otherwise would be.
Private plans purchased through the ACA exchanges by lower-income individuals are eligible for subsidies and credits indexed to income and thus are progressively funded for this sector. But middle- and upper-middle-income individuals do not receive these subsidies and thus bear a disproportionate share of our collective (pooled) health care spending (disproportionate as a percentage of income). The latter also is true for those purchasing individual plans outside of the exchanges. For them, funding is regressive since the percent of income paid for heath care decreases as income increases.
By far the largest source of health insurance is through employer-sponsored plans. Almost all economists agree that these are paid for by the employee through forgone wage increases (certainly a contributing cause to flat wages of the last couple of decades). This funding is quite regressive since, as income increases, the percentage of wages devoted to health insurance premiums decreases. Further, premiums are subsidized by tax expenditures (the deductibility of premiums for employer-sponsored plans) which increase as the individual's income increases. High-income individuals receive very generous government subsidies for their health insurance plans whereas lower-income individuals may receive little or none at all. Thus health financing for the majority of us is quite regressive.
The article by Josh Bivens is quite long but well worth reading if you want to understand policies that will shift us to progressive redistribution without having to feel guilt. The economic improvement for the great majority of us, creating a more robust economy, is well worth the trade off of expecting the wealthy to accept more progressive redistribution, which would certainly never negatively impact their very comfortable or even indulgent lifestyles.
Health care? Based on the examples above, we can certainly adopt policies that would significantly improve progressive redistribution so that health care is affordable for everyone. That is exactly what a well-designed single payer system does. No guilt, just ghastly politics.