Income Inequality, Magic Ponies, and the Presidential Candidates

I've never understood why so many liberals and progressives think the Democratic field is strong. Yes, the candidates aren't insane, but neither of them are particularly good on economic issues. There is nothing in either Clinton's or Obama's records or speeches that suggests that they will do anything significant to reduce income inequality, other than perhaps letting the Bush tax cuts expire (and Obama has even been waffling on that).

And keep in mind, that income inequality isn't just a matter of economically integrating more people into society. That's not some gushy, "it's not fair" statement: there's a reason college costs have skyrocketed since the Reagan era--there are enough people, believe it or not, who can pay cash on the barrelhead for a college education (or two). Given that one reason for the increase in income inequality is declining taxes on the wealthy and wealth, this has also hurt our infrastructure: safety regulation, education, transportation, and research, just to name a few areas.

So when I read this "Responsible Plan for Redressing Income Inequality", which I think most liberals and progressives would support (including me), it made me sad (bold original; italics mine):

Fairer Tax Policies We have all heard that wages have been falling recently. But at the same time the share of income derived from capital has been rising. The EPI report linked above attributes much of the growth in income inequality to the rise in the amount of income derived from capital, as rents, dividends, interest and capital gains, compared with labor income. While labor income fell as a share of aggregate personal income by 4 percent, capital income grew by 8.3%. Since the top percentiles own a disproportionate share of capital assets, they reaped the lion's share of the gains, increasing the base from which they can generate yet more income.

Moreover, capital income is given preferential tax treatment. Wage labor is doubly and triply taxed, through Social Security taxes and federal and (often) state income taxes. By contrast, most dividends and capital gains are taxed at a maximum 15% rate, interest used to acquire capital assets, including mortgate interest, is not taxed, there are various write-offs for income-producing property, and interest income from municipal bonds is not taxed. Most income of hedge-fund managers is taxed as capital gains not salary.

A first step would redress these imbalances by reversing most of the Bush tax cuts: raising the capital gains tax at least back to 20% and taxing dividends as ordinary income, except, perhaps, for the first $3000 or so of dividends from domestic companies, and freezing the estate tax exemption at the current level of $2 million and retaining the high tax on amounts over that level. As more and more income is generated from financial transactions, a small transfer tax on stock purchases and sales, such as the modest .25% imposed by the UK and recently proposed by Dean Baker would cost the investor only $2.50 per $1000 in stock and generate as much as $150 billion a year. Given the huge rise in incomes of the top 5% over the past several years, an increase in the top income tax rates back to the level they were under Bill Clinton would be entirely appropriate. At the very least a top bracket of 37.5% for those happy few with taxable incomes over $700,000 should be created. The earned income tax credit should be increased.

Expanding opportunity We need to remove as many as possible of the barriers that limit upward mobility. Aid to college students has not kept pace with inflation and needs to be greatly increased. Unions need to be strengthened, not hindered. We need more policies that aid the creation of small business and fewer subsidies for big business. Encouraging energy-saving and alternative energy technologies would create new jobs and businesses while reducing oil consumption and greenhouse gas emissions. Agricultural subsidies should be capped, which would have the added advantage of modestly lowering food prices here and abroad.

Rebuilding the safety net During the Bush years the federal government and even some states have cut back on various forms of assistance to low-income people, enacted pro-creditor bankruptcy legislation, failed to enforce the laws against predatory business practices, repealed or failed to enforce regulations that protect our food and drugs and consumer products and failed to reform the health care system. All of these policy decisions have made it more difficult for people to recover from setbacks, thus exacerbating inequality.

....This means further raising and indexing the minimum wage, reversing the decline in unemployment insurance, revisiting the 2005 bankruptcy legislation, reregulating or strengthening enforcement to protect consumers, dealing with the victims of predatory lending practices (and the perpetrators), and above all reforming the health care system so that people get the care they need at a reasonable cost and serious illness does not mean financial devastation.

A sane political system would give voters the option to seriously address income inequality. Instead, we get lengthy discourses about bowling and beverage preferences that crowds out any such discussion. Without this discussion, this option doesn't exist.

Neither Obama nor Clinton are going to deal with these problems in any substantive way, if for no other reason that I don't think either of them will be willing--even if they were able--to create the necessary fiscal environment to do any of these things on a reasonable scale.

Of course, McCain, who has embraced more tax cuts, will just keep digging the hole deeper...