I'm not paying for it, but here it is anyway :
AMERICANS are not known for their love of income redistribution. Asked to rank, on a scale of one to ten, how important it is for democracies to reduce inequality, they say only six; Europeans say eight. Yet the country is hardly indifferent to who gets which slice of the economic pie. Three in five Americans say that income and wealth should be spread around more. The most potent charge laid against the unpopular Republican tax plan making its way through Congress is that it is a giveaway to the rich and to corporations—groups that voters, by large margins, think should pay more tax, not less.
This strange amalgam of views manifests itself in fiscal policy. The federal government has no qualms about making the rich pay the country’s bills; it has perhaps the most progressive tax system in the rich world, according to one study from 2009. But it pulls off only half of Robin Hood’s trick, because it funnels very little of the money it raises towards the poor. In combination, its reluctance to redistribute is the stronger force. America’s government reduces inequality by much less than those of other rich countries (see chart).
America’s levies rise with income, but not to particularly great heights. In 2016 the top rate of income tax averaged about 46% once state taxes were included, less than France’s 55% or Sweden’s 57%. So what makes its taxes so progressive? The answer is twofold.
First, America has no value-added tax, a levy on consumption. Because VATs are flat taxes, they are regressive. In any given year VATs cost the poor a higher fraction of their income than the rich, because high earners tend to save more. The average rate of VAT in the OECD, a club of mostly rich countries, is about 19%. Many American states levy sales taxes, which are similar to VATs, but are on average less than 10%.
Second, America’s generous deductions and credits, or “tax expenditures” in the jargon, are good for the working poor. Chief among them is the earned-income tax credit (EITC), a wage top-up for low earners. The child tax credit, a refund for parents, is another. In dollar terms the rich do best from tax expenditures, because of breaks for mortgage interest and employer-provided health insurance. Yet as a percentage of income, the poor benefit most. In 2013 tax expenditures boosted the incomes of the poorest fifth of households by almost 12%, according to the Congressional Budget Office. A single mother with two children earning two-thirds of the average income pays overall taxes of just 13% in America according to the OECD. In egalitarian Sweden the charge is almost 34%.
The Republicans’ tax reform would not do much to alter these fundamentals. The bill that passed the House of Representatives on November 16th expands the child tax credit, leaves the EITC unchanged and limits several deductions that benefit the rich. It preserves the top rate of federal income tax (though it raises the threshold at which it applies). Yet Democrats are still up in arms for two other reasons. First, changes to inflation indexing and the sunsetting of some clauses would hit the poor in the long term. Second, and most important, the bill would cut the corporate and estate (inheritance) taxes.
This would continue a long-running trend. Both taxes have been falling—and incurring more avoidance—for decades. In 1967 they raised a combined 4.4% of GDP; by 2016 this had fallen to 1.7%. Who benefits from lower corporate taxes is a controversial question. The answer is some combination of investors, through higher profits, and workers, through higher wages. The best guess is that about 75% of the benefit goes to rich investors. There is less ambiguity about who pays the estate tax, which kicks in above about $5.5m.
In any country the left would surely oppose such tax cuts. But it is not clear whether, over the long term, America’s left should focus on keeping taxes progressive or on boosting spending. The international comparison suggests expenditure is more important. For all America’s tax progressivity, its poor, especially those without children, languish. In a dozen other countries, those in the tenth percentile of household income are better off, according to an analysis by Demos, a think-tank, from 2015. What is more, seven in ten Americans want to boost spending on the poor. A more regressive—but more lucrative—tax system, including a VAT, might enable such spending. Republicans, who normally like flat taxes, tend to oppose VATs precisely because they fear these make it too easy to expand the government.
But if spending on the poor is branded as “welfare”, conjuring up images of layabouts, support for it plummets. Seizing on this, conservatives like to argue that many beneficiaries of programmes like Medicaid, health insurance for the poor, are undeserving. The receptiveness of Americans to their argument explains why raising taxes on the rich is easier than raising spending on the poor.
Still, it may be that the most consequential impact on inequality of Republicans’ tax reform comes not from its direct effect on incomes, but rather from its knock-on effects on government spending. America would eventually have to pay for the tax cuts, which would add around $1.5trn to total borrowing over the next decade. That would make a bad fiscal outlook worse. Growing spending on health care and pensions for the retired is already expected to push up the deficit from 3.2% of GDP in 2016 to 5.2% of GDP in 2027.
Even bigger deficits will make it easier for Republicans to justify cuts to entitlement spending, which they frequently say is unaffordable. The Republican plan to repeal and replace Obamacare, which flopped earlier in 2017, would have reduced Medicaid spending by 35% by 2036 (Medicaid spending is the biggest slice of the federal budget that is dedicated to the poor). The tax bill may eventually allow them to achieve a similar result and more.
In reality, America could afford a bigger state; the question is whether it wants to. This coming fight, over the size and responsibilities of the federal government, will matter more than an argument over precisely who pays for what.