Good Government Counters Inequality

Below is an insightful essay by the publisher of Governing magazine, reprinted with the author’s kind permission.

Although the limited effectiveness of the proposal considered (effect of hiking marginal tax rates for high earners and giving the money to bottom-fifth households) mainly just shows that particular idea to be a Samuelson straw man (there are many more powerful, effective ways we could raise taxes rather than trying to do so by a hike in the ordinary income marginal rate — a tax that few in Mitt Romney’s set pay at all), Funkhouser’s larger point is still right on target:

Trying to fight inequality by direct attack on the haves to give to the have-nots is a poor strategy when there are so many more effective lines of attack available in every city and suburb, starting with doing the elementary basic tasks of governance better.

We must start by recognizing that America is beset with hidden taxes — costs and fees that aren’t called taxes but that actually are, because they come at the expense of the kinds of public goods that should be provided through taxation. The archetype of this is the “lack of transit” tax, a tremendous burden that is disguised as a “free market” outcome.

A Better Way to Attack Inequality Than Redistributing Wealth

Everyone talks about taxing the rich to give to the poor, but doing so would only have a small impact. There are ways to have a larger one.

by Mark Funkhouser | January 2016  

Many government leaders are justifiably concerned about our country’s huge and widening gaps in wealth and income and are looking for ways to reduce economic inequality and improve social equity. What surprises me, however, is how often, on both the left and the right sides of the political spectrum, the discussion turns to the idea of redistribution — taxing the rich to give to the poor by increasing social welfare payments.

In this scenario, as The Washington Post’s Robert J. Samuelson wrote a few weeks ago, “redistribution becomes an engine of social justice.” He cites a recent Brookings Institution study showing that increasing the top federal individual income tax rate from the current 39.6 percent to 50 percent would raise about $100 billion in tax revenue annually and that distributing that money to the poorest fifth of Americans would amount to an average of $2,650 per household.

In my view, there are real problems with thinking about redistribution in this way. First, many Americans don’t think that taking money from one person to essentially give it to another is a legitimate function of government. Second, redistribution is divisive, separating out the poor as a special class of people when we should be pursuing policies that increase unity and a sense of commonality among all Americans.

Instead of pursuing redistribution, state and local government officials should focus on the powerful impact on social equity of simply improving the operations of their governments. The welfare checks that might be generated by raising taxes on the rich would be small, while the aggregate impact of better policing, better schools and better public transit would be large. Everyone benefits when governments deliver services with fairness and competence, but the poor and the vulnerable benefit disproportionately because they are the most dependent on public services.

Ferguson, Mo., and Baltimore, for example, have given us some insight into the huge societal costs of unfair and incompetent administration of criminal justice. As for education, consider this: A person who doesn’t finish high school can expect about half the lifetime earnings of someone who does get a diploma.

And then there’s the one that bothers me the most because it seems so much more straightforward to improve than reforming our criminal justice system or public schools: transit.

Here again, numbers tell the story: The official federal poverty level for a family of two is $15,730. The average annual cost of owning and operating a car is $8,698. Obviously, owning a car is financially difficult for a poor family and yet, in most of America, there is no other way to get to work and to carry out the basic tasks of life. For any mayor wanting to make a difference in terms of social equity, an affordable and fully functioning transit system ought to be a high priority.

The wealthy don’t really need transit or many of the other basic services of local government. They can take care of themselves, with private cars, private police and private schools. Tax them if you want to, but use the money to run a good government.