Yesterday, I discussed an extremely important essay by Piketty, Saez, and Zucman. Today, I want to quote several passages, and comment on their significance for American politics. [By the way, I had no recollection of having read it before and having linked to it on August 31 of this year! Clearly, I am losing it. I mean, it is amusing when I discover in my files something I wrote thirty years ago and have since forgotten I wrote, but this is ridiculous. Maybe it is not such a bad thing that I am in an old people’s home.]
Here are three passages, each from the last pages of the essay.
(1) p. 601 “In 2014, payroll taxes amount to 11.3% of pretax income, significantly above the next largest items—federal and state income taxes, 6.6% of pretax income, and sales taxes, 4.7%. Although payroll taxes finance transfers—Social Security and Medicare—that go in part to the bottom 50%, their increase contributes to the stagnation of the posttax income of working-age bottom 50% Americans.”
So in effect, the payroll taxes paid by the lowest waged half of the population are going to subsidize the improvements experienced by the better off half. In short, this is massively regressive taxation.
(2) Also from p. 601 “Transfers. One major evolution in the U.S. economy over the past 50 years is the rise of individualized transfers—monetary and more importantly in-kind. While public goods spending has remained constant around 18% of national income, transfers— other than Social Security, disability, and unemployment insurance, which are already included in pretax income—have increased from about 2% of national income in 1960 to close to 11% today. The two largest transfers are Medicare (4% of national income in 2014) and Medicaid (3.4%); other important transfers include refundable tax credits (0.8%), veterans’ benefits 0.6%), and food stamps (0.5%). Overall, individualized transfers tend to be targeted to the middle class. … Despite Medicaid and other means-tested programs which entirely go to the bottom 50%, the middle 40% receives larger transfers than the bottom 50% Americans, in particular because Medicare largely goes to the middle-class. In 2014, the bottom 50% received the equivalent of 10.5% of per-adult national income, the middle-class received more—14%—and the top 10% received less—about 8%.”
(3) p. 603 “The middle class appears as the main winner of redistribution: while it receives growing individualized transfers, its effective tax rate has remained stable at around 30% since the late 1960s. Transfers have played a key role in enabling its income to grow in recent years. Without transfers average income for the middle 40% would not have grown at all from 1999 to 2014. In fact it grew 8%, thanks to an increase of 32% in transfers received excluding Social Security. Tax credits—the 2008 Economic Stimulus Payments, the American Opportunity Tax Credit, the Making Work Pay Tax Credit, and Health Insurance Premium Assistance Credits (in the context of the Affordable Care Act)—played a particularly important role during the Great Recession. Without transfers the average income of the middle class would have fallen by 11% between 2007 and 2009; thanks to transfers the decline was limited to 3%. In contrast, given the dynamic in their pretax income, transfers have not been sufficient to enable bottom 50% incomes to grow significantly.”
Read these three passages carefully and then think about the rhetoric and the policy priorities of the Democratic Party in the last several election cycles. Democratic candidates talk incessantly about “the Middle Class,” and their policy proposals deal with the sorts of transfer payment programs that have benefitted the 50th to 90th percentiles of the American population. Their efforts have been successful, as the statistical analysis of this essay demonstrates, both in making possible increases in real posttax income for that 50-90% income group over the past two generations and, equally important, in cushioning the blows of economic downturns for the same group. No one in American politics has been looking out for the bottom half of the population.
All of this long predates the faux populism of Trump and, unless there are major changes in existing transfer programs, will continue unaltered after he passes from the scene. The Democratic Party has survived, and perhaps is even flourishing, essentially by pursuing policies that help that “middle” group from the 50th to the 90th percentile, while being visibly non-racist and non-sexist, which brings to its support millions of Americans who are not actually very much helped economically by its policies.
Limiting ourselves to the politically possible, as opposed to the ideologically desirable, what policies might the Progressive wing of the Democratic Party embrace in an effort actually to help the bottom 50%? It is not hard to think of some, in fact. Here are four:
Raise the wage limit on social security taxes and use the additional monies to decrease the tax on the first 30 or 40 thousand dollars of earned income.
Dramatically raise the minimum wage so that, adjusted for inflation, it at least recaptures what it has lost to inflation over the past thirty years.
Medicare for all, with the cost means tested so as to constitute a transfer payment from the top 50% to the bottom 50%.
Cancel the recent tax decreases for the rich and impose new inheritance taxes to pay for the rise in transfer payments to the bottom 50%.