Giving When the Need is Gone

Stop it already

American Enterprise Institute blogger James Pethokoukis posted an interview with University of Chicago economist Steven Kaplan entitled, "Capitalism under fire: What’s really driving income inequality?" I don't have an answer but wanted to toss out some thoughts of my own.

Mr. Pethokoukis asks, "So from your research, what do we really know about income inequality and what’s driving it in the United States today?" to which Mr. Kaplan answers:

So here is my view of what’s happened in the last really 30-35 years. We’ve had a huge amount of technological change. And that has coincided with globalization. And they’re related. Technology allows you to do a lot of things overseas that you couldn’t do before. And so the combination of technological change and globalization has put pressure on the middle class and particularly the less skilled in the developed countries.

This graphic from the Financial Times illustrates the pressure Mr. Kaplan describes and the resultant changes on income distribution.

No grand theories or speculative conclusions here, just a few thoughts:

• The time period in the graphic and the one Mr. Kaplan describes is a little more than one generation (about 25 years)
• That generation saw the college-educated workforce rise from about 20 percent in 1970 to nearly 55 percent in 2010
• Congress instituted an R&D Tax Credit in 1981 and that credit continues today
• While real hourly wages rose only 6 percent between 1979 and 2013, total compensation including employer-provided benefits rose 38 percent
• The largest tax expenditures (deductions and exclusions of income from taxation) are employer-provided healthcare, pension contributions, and mortgage interest relief – most of which benefit higher-income households
• The Economic Growth and Tax Relief Reconciliation Act of 2001 provided for preferential tax treatment of income from capital gains and dividends, and that preferential treatment continues today

So ... "a huge amount of technological change" driven by tax credits and an increasingly smart workforce whose nonwage compensation, homeownership, and investment income is not taxed or taxed at a lower rate – in essence, subsidized. Education got this generation rolling and continues to be a key for the success of future generations. But once rolling, do we really need favorable tax policies to keep pushing?

The Salvation Army says, "Our focus is on giving people a hand up, not a handout." But Congress keeps handing it out, long after the need is gone.