54 Pages Posted: 28 Jan 2014
Date Written: January 27, 2014
The goal of this article is to provide a guide to addressing tax and spending policies in an era of increasing inequality of income and wealth. This is challenging because it requires a good understanding of inequality and economic mobility, the changing role of taxes and government social spending, the constraints on policy options, and the possible misconceptions that may influence tax and spending policies.
Inequality in the United States has increased dramatically over the last 30 years. Perhaps even more troubling than the rise in inequality may be the persistence of high levels of poverty and the decline in economic mobility. The same thirty-year period during which inequality has increased, poverty levels have not declined, and economic mobility has decreased has seen major changes in fiscal policy. Tax law changes have altered the relative tax rates, the relative revenue contributions from different tax instruments, and the tax burdens of different income groups. Government spending on social programs has increased substantially, but perhaps not in ways one might expect. The United States likely has a smaller percentage of government social spending going to the needy than other developed countries. In recent decades, an increasingly larger percentage of social spending has been directed to the elderly (without regard to need) and to the upper-half of the income distribution through tax subsidies for healthcare, education, housing, and retirement savings.
The essential first step in shaping fiscal policy is to identify clearly the relative priorities among reducing inequality, reducing poverty, and increasing economic mobility. Tax and spending policies will differ depending on the weight given each of these objectives, and especially in a world of relatively limited resources, the government needs to make difficult choices. Perhaps the most significant implication of this reality is that it may be time to stop thinking about increasing the income tax burden on the wealthy as the only, or perhaps even the primary, way to increase funding for social spending programs. The United States may need less progressive (or even regressive) taxes to fund more progressive spending programs.
Keywords: Fiscal redistribution, taxation, government expenditures, public social spending, inequality, and fiscal contract
Suggested Citation: Suggested Citation
Zolt, Eric M., Inequality in America: Challenges for Tax and Spending Policies (January 27, 2014). 66 Tax Law Review 1101 (2013); UCLA School of Law, Law-Econ Research Paper No. 14-02. Available at SSRN: https://ssrn.com/abstract=2386285
By Richard Bird