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The Road to Redistribution: Why Government—Not Business—Takes the Lead in Reducing Inequality

David Callahan

Americans don't like inequality and the want to do something about this problem. But they aren't crazy about using government to redistribute wealth and income. Instead, they would rather see bigger investments in education to expand opportunity and have businesses pay higher wages.

That's one finding of a fascinating new book on inequality and public opinion by Leslie McCall, The Undeserving Rich. (I wrote Tuesday about the book here.)

Now an obvious question: If Americans would rather bolster our schools and hike the minimum wage than soak the rich, why has the U.S. largely taken the opposite approach? 

Think about it: Over the past twenty years, the minimum wage has fallen way below where it was in 1968, adjusting for inflation, and our nation's schools are as segregated and unequal as ever thanks in large part to the antiquated way the U.S. funds public schools with local property taxes. Moreover, research shows that poor kids are less likely to go to the best colleges than in the past and, as I wrote here, colleges give less financial aid today to poor kids and give more to affluent kids. Also, the purchasing power of Pell Grants is at an all time low and states have enacted record cuts to higher ed. 

In other words, business has been let off the hook for reducing inequality and the U.S. has disinvested in key paths for upward mobility. 

Meanwhile, though, government's role in directly redistributing wealth has greatly increased since the early 1990s. The Earned Income Tax Credit was dramatically expanded by President Clinton and expanded again by President Obama, who enacted additional tax credits beyond the EITC that benefit the working poor. Together, the ramping up of these tax credits amounts to the biggest attack on inequality since the Great Society -- all by literally giving low-income people tens of billions of dollars a year in cash. You can't get more redistributive than that.

The federal government has also greatly expanded access to healthcare for low-income households: First through SCHIP in the 1990s, than through Medicare coverage of prescription drugs under Bush, and finally through the Affordable Care Act of 2010. 

Whatever else can be said about Obamacare, it is clearly a redistributive program. It finances a dramatic expansion of Medicaid to cover lower income households and subsidizes the insurance premiums of individuals of modest means—paid for, in part, by a Medicare surcharge tax that took effect January 1 of 3.8 percent on households making over $250,000. If you make $10 million this year, you'll pay an extra $380,000 in Medicare taxes under the Affordable Care Act (at least in theory) to provide healthcare for your less fortunate countrymen. Again, that's a pretty naked form of redistribution. 

Other taxes are also going up for higher income folks, thanks to the "fiscal cliff" deal in January which raised income, dividend, and capital gains taxes for households making over $400,000 -- while leaving taxes at historic low levels for everyone else. After that deal, a New York Times analysis found that the tax system might be more progressive than at any time since 1979.

So while Washington hasn't done nearly enough to combat rising inequality, it would be wrong to imagine that it has done nothing. Yet how do we explain the fact that it has embraced the putatively less popular redistributive options over more popular steps to make business pay and expand educational opportunity? 

The answer may lie in the nature of our pluralist democracy. It is easier to impose relatively small costs on a large number of disorganized citizens than to impose bigger costs on smaller, but well organized interests -- e.g., retailers and restaurant chains who would have to foot a big bill for raising the minimum wage and spend a fortune on lobbying.

All taxpayers shell out a little more every month to cover the cost of the EITC and Child Tax Credit (which was about $77 billion in 2011), but those costs are so dispersed we're not likely to notice. Make CVS pay its workers $9 an hour and the drug giant will notice all right, even if it can easily afford such a hike. 

But there's more: As I have noted here often, CVS and other low-wage employers benefit immensely from tax credits to low-income workers and other public assistance to the working poor. In effect, we the taxpayers are collectively giving a raise to low-wage workers that allows them to survive while their employers pay the bare minimum and pocket record profits. This public subsidy is far larger than, say, the tax breaks given to oil companies. 

Redistributive policies may be unpopular in theory and also bad economics in some cases, but they work politically in a strange way. And if low-road employers are getting off the hook when they do payroll, their profits are still eventually being taxed at a higher rate than in the past when individual shareholders and executives have to file their taxes.

Maybe all this is not so bad. Better yet would be new victories in getting business to pay more, such as raising the minimum wage, while keeping all the progress we've made elsewhere in redistributing wealth to mitigate inequality. Then we'd really be getting somewhere.