NCPA - National Center for Policy Analysis


October 4, 2006

Left-leaning populists believe strengthening unions and cowing big business will narrow the gap between rich and poor, says the Economist.

However, that argument is nonsense. The principal causes of rising inequality in the United States are rapid technological innovation and globalization, says the Economist. Neither business-bashing nor union-boosting will turn back the clock.

For those who are serious about fighting inequality, the top priority should be tax reform.  The U.S. tax code is a tangled mess that benefits rich people while reducing economic efficiency.  For example

  • The mortgage-interest deduction, a subsidy for home-owners, costs some $80 billion a year, does little to help poor people buy their own homes and does a lot to encourage rich people to buy McMansions.
  • Over half the subsidy goes to the richest tenth of Americans.
  • Tax incentives for employer-provided health insurance cost some $150 billion a year and are a big reason for America's escalating medical costs.
  • Again, the richest tenth of Americans captures more than one-quarter of the benefits.
  • All told, the tax code is larded with more than $700 billion-worth of inefficient subsidies.

Scaling these back would improve the economy's efficiency and would free up a huge amount of money, says the Economist, both to reduce the deficit and to shift resources to poorer Americans.

Source: Editorial, "Helping America's Workers," the Economist, September 23, 2006.

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