Help the Poor without Taxing the Rich

June 2, 2014

"To lift the poor, you can't avoid taxing the rich," wrote Center on Budget and Policy Priorities fellow Jared Bernstein recently in the New York Times. Jason Russell, research associate at Economics21, picks apart Bernstein's claims.

Bernstein writes that inequality is rising, therefore creating barriers to mobility.

  • This link between inequality and mobility often comes what is known as "The Great Gatsby Curve," a chart created by economists Alan Krueger and Miles Corak that purports to show that greater income inequality reduces mobility.
  • However, Russell cites a Manhattan Institute study showing that when more accurate measures of mobility and inequality are used, no significant relationship exists between mobility and inequality.

To lift the poor from poverty, Bernstein calls for a publicly funded infrastructure program with jobs targeted at the poor.

  • But Russell writes that another stimulus will fail, just as the February 2009 stimulus failed.
  • A year after the first stimulus passed, unemployment had risen 1.5 percentage points and labor force participation had fallen 0.9 percentage points.
  • While employment rose in May 2010, the rise was due to government hiring for the U.S. Census, not the stimulus.

Bernstein claims that the U.S. is not collecting enough revenue to fund government programs, noting that the average federal tax rate and revenue as a percent of GDP is lower today than it was in 1990.

  • However, Russell explains that this does not mean that the government lacks enough revenue for welfare programs.
  • In 1990, the government spent 9.5 percent of GDP on transfer payments, while it spent 15.3 percent of GDP on such programs in 2010.

Bernstein argues for universal preschool, contending that it will make workers more productive.

  • But despite $8 billion in annual funding, Head Start programs have little, if any, impact by the time participants have reached third grade.
  • School choice programs, on the other hand, have proven to be successful in improving educational outcomes, while at the same time saving taxpayer money.

Russell notes that countries with more economic freedom -- lower taxes, fewer regulations and smaller government -- have less poverty than those with high taxes. If the U.S. could tax its way to prosperity, it would already have done so.

Source: Jason Russell, "How to Help the Poor Without Taxing the Rich," Economics21, May 22, 2014.

 

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