John Edward teaches economics at Bentley and UMass Lowell. He’s a frequent contributor of columns on economic issues. Here is his latest:
Here’s an idea – off with their heads! First came the Enlightenment. Then came the Revolution. The French stormed the Bastille 225 years ago today. Soon, Louis the XVI would incur the wrath of inequality in the form of the guillotine.
Consider this option – World War III! Granted, there was massive loss of life and appalling human suffering during the World Wars I and II. However, when the fighting was over, we had much more equality.
Perhaps we should consider a less drastic measure. We need to do something. Otherwise something drastic may happen when we fall off the social cliff.
No one has done more to measure excessive inequality than Thomas Piketty. In his new book Capital in the Twenty-First Century he surveys how bad things have gotten and what we can do about it.
How bad have things gotten? Based on Piketty’s extensive research the United States has reached “a record level of inequality of income from labor (probably higher than in any other society at any time in the past, anywhere in the world).”
How bad could things get? Piketty says: “Is it possible to imagine societies in which the concentration of income is much greater? Probably not… a revolution will likely occur, unless some peculiarly effective repression apparatus exists to keep it from happening.”
However, looking at his own country (France), Piketty finds periods of excessive inequality that were followed by increases in equality. He cites three “instigators of egalitarianism:”
1. The French Revolution.
2. World War I
3. Emergence of a healthy middle class.
Option 3 is clearly a less drastic approach. However, Piketty’s proposals for promoting a healthy middle class are quite drastic. I will propose a more modest yet admittedly ambitious policy change.
Piketty places most of the blame on tax policy: “the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance.” He goes on to say: “taxes suffice to explain most of the observed evolutions [of inequality].”
Piketty, like many other economists, puts partial blame for the Great Recession on inequality: “there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability.”
Low and middle-income households responded to the increasing wage gap by borrowing more. Consumers relied on rising property values. Eventually the housing bubble burst. Mortgage defaults sent shock waves through the shadow banking system.
Recall that many economists cite inequality as a contributing factor leading to the Great Depression.
Piketty recommends changes in tax policy at the federal and international level. His prescriptions are practical and make sense given his diagnosis. They are also sweeping. They are also unrealistic given the current political climate.
The primary goal of Piketty’s recommendations is to restore some of the tax progressivity we had back in the mid 20th century.
Recall that in the 1950’s the economy was very healthy, with much more equality.
Right now, it is very hard to imagine comprehensive tax changes from Capitol Hill. In the meantime, perhaps Beacon Hill is capable of pulling off a less drastic measure.
Massachusetts has a reputation for being blue, liberal, and progressive. We may be Democrat blue, but our tax policies are hardly liberal. In fact, the Commonwealth of Massachusetts has a very regressive tax structure.
Recall that a regressive tax is one where your tax rate goes down as your income goes up.
The problem is not how much we all pay in taxes. The important issue is who pays.
We are one of only eight states to have an income tax that is not progressive. Very regressive sales, excise, and property taxes generate much of state and local revenue.
A study by the Institute on Taxation and Economic Policy (ITEP) shows how regressive our taxes are. The top 1 percent of income earners in Massachusetts pay state and local taxes at a rate about half of what low-income earners pay. Regressive taxes transfer money from the poor to the rich, thereby increasing inequality.
Implementing a progressive income tax requires amending our state constitution. If we are to promote the common wealth we need to make it happen.
In March, the Tax Fairness Commission established by the Massachusetts legislature released their findings. The commission’s first recommendation is to institute a graduated income tax.
One candidate for Governor, Donald Berwick, has made a progressive income tax part of his campaign. If he wins, he will have a clear mandate.
Recall that candidate Deval Patrick promised to promote tax fairness. He had no clear mandate because his campaign promise was vague. Tax fairness is a broken promise.
To achieve tax fairness, Massachusetts needs a progressive income tax. The regressive taxes we have now are making it difficult for low-income families to make it to the middle class. Regressive taxes are increasing already severe inequality.
Inequality is a socio-economic crisis. Therefore minimal scrutiny is appropriate with respect to the need for remedial measures.
However, with respect to the results, we need audit scrutiny. We are fortunate that ITEP performs their studies. The Massachusetts Office of Tax Policy Analysis under the Department of Revenue used to conduct such distributional analysis of our taxes – who pays. That stopped under Governor Weld. Perhaps the results were too embarrassing.
The Office of State Auditor should take responsibility for assessing who pays. Then they can audit the results of any changes to Massachusetts tax policy.
The objective with a progressive tax is not to raise more revenue. This less drastic measure will promote tax fairness, equality, and a healthy middle class.