Buffett Rule

Alice Rivlin at the Brookings Institution has commented on the controversy surrounding the Buffett rule.  This is a proposal to make sure that the rich pay at least as high a tax rate as people who have lower income.  That is the rule is against regressive taxation.  Some protest by shouting "class warfare".  I don't think that is a constructive response.  Alice Rivlin is quite right that we should have a reasoned debate about income inequality and the impact of taxes on this.

However, there are many rational arguments that need to be made against Mr. Buffet's analysis.  By neglecting corporate income tax and failing to consider the proportion of capital gains income that is illusory, we risk distorting the picture of taxation in our country in order to make the system look regressive when it is in fact progressive.  The response should not be to object to the Buffet rule out of hand, but to request that it be implemented in conjunction with eliminating corporate income tax and redefining capital gains income so that the cost basis takes inflation into account.

The U.S. has one of the world's most progressive systems of income tax.  What sets us apart from other industrialized nations is not a regressive system of taxation.  Our system does more to lower the Gini coefficient than that of other countries including Canada and the Scandinavian countries.  The latter actually have a somewhat regressive system of taxation.  What makes the U.S. system less progressive is more modest transfer payments to the poor.  This is where Canada and especially the Scandinavian countries do more to lower the Gini coefficient in disposable income.

I have mentioned in a previous post that the national debt probably has an adverse effect on income inequality.  A look at the evolution of the Gini coefficient in various countries in the post WWII period shows that it went down in some countries and up in others, so it is likely that there are some policies that could have some effect on pre tax and transfer income inequality as well as an effect on inequality after taxes and transfers.

I suspect that the impact of rules regarding unionization is quite complex.  It would be possible for unions to level out income differences, but they could just as easily exacerbate inequality.  It all depends on whether they would raise income for those who would have earned above average incomes even without unions or alternately raise the incomes of the poorer members of society.

Minimum wage has been advanced as a possible method of raising the incomes of the poor.  However, if it is true that minimum wage laws cause or exacerbate unemployment, then this could actually harm the poorest members of our society even if it were to reduce income inequality.

What is ought to be more certain is that professional licensing for some of the most highly paid professionals contributes to income inequality.  Requiring physicians and lawyers to obtain licenses in order to practice.  The step of allowing everyone to practice medicine without a license seems rather radical.  There might very well be reasons why we wouldn't want to go that far, but we also need to acknowledge that this will cause some economic inequality.  Think of this as a cost that we need to consider when thinking about whether requiring licenses is a good idea.  I personally oppose licensing requirements of this sort, and I think that there are better ways of giving customers information about physician quality, but this goes beyond the scope of this post.

When you want to make changes in the system, you need to start with the things that will be seen as the least radical, but will still make a big difference.  That's why I suspect that these sorts of reforms should likely start with the legal profession.  Perhaps it would be useful to take a comprehensive look at various professions to see which of them have high salaries, employ many people and require licensing.