The Floor and Ceiling Approaches to Income Redistribution
A Brief Overview of the Current (And Potential) Regulatory Solutions To Address Income and Wealth Inequality in the United States
For months, governments around the world have been sorting through the economic devastation caused by the Coronavirus Pandemic, putting in measures in an attempt to spur a U-shaped recovery, and avoid what seems to be an inevitable K-shaped one. But there’s another, more sinister U that has been growing for decades, one that is not a sign of a healthy economy.
In the early 2000s, economists Thomas Piketty and Emmanuel Saez used a century’s worth of data to visualize income and wealth inequality over time. Their findings validated a sense of injustice what many had been experiencing: by 2013 the top 0.1% were collecting over 10% of the nation’s income. The top 10% earned 50% of the nation’s income. After a period of compression and growth of the middle class that began in the 1940s—due in part to the New Deal, financial regulation, progressive taxation, and World War II—modern American society had reverted to the way it had looked in the age of robber barons and monopoly tycoons. Inequality over time was U shaped.
What We Should Do About Inequality
It’s true that some inequality is good for society in a capitalist system: inequality creates stakes and incentives to produce and innovate. But a society where 90% of people can work hard their entire life and see no meaningful material gains for themselves or for their children, the incentive system breaks down.
This is not an article about the causes of inequality or the optimal amount of inequality, but rather an overview of the various policies that the American government has explored in an attempt to redistribute gains. I’ve broken down these policies into two categories:
- Floor Policies: ways that the government attempts to provide a social safety net for those with the lowest incomes or wealth.
- Ceiling Policies: ways that the government attempts to redirect funds from those with the highest income or wealth.
These policies are not mutually exclusive—in fact, they tend to complement one another, with money from the ceiling used to fund the floor. Another important distinction is the mechanism that is used to redistribute these funds:
- Firm-based: policies directed towards corporations, indirectly effecting workers by regulating wages or use of corporate funds.
- Citizen-based: policies that redistribute resources directly to/from individuals and families, such as transfer payments or tax credits.
Once again, these aren’t perfect categories. For instance, although I’ve labeled the Earned Income Tax Credit as direct, these benefits are a function of income earned at a firm. But it’s an attempt to illustrate a few (this is far from an exhaustive list!) existing and proposed methods of redistributing wealth and income.
The Ceiling Approach
(*) Indicates that this measure has been proposed, but is not in place as of 2020.
- Anti-Trust Laws: The Sherman Anti-Trust Act, Federal Trade Commission Act, and Clayton Anti-Trust Act are laws used to restrict uncompetitive business practices and consolidation of monopoly power. These laws can technically be used to protect workers from wage collusion and monopsony employers, but have been used ineffectively for this purpose.
- Stop Bad Employers by Zeroing Out Subsidies (Stop BEZOS)*: This proposal from Senator Bernie Sanders is a response to the prevalence of employees who earn so little from their full-time jobs that they qualify for welfare benefits, such as food stamps and Medicaid. The act would create a corporate welfare tax which could be charged in proportion to the number of employees who receive welfare benefits, as disincentive against unlivable wages.
- Robot Tax*: This idea was proposed by Bill Gates, among others, as a means to align the tax structure with the changing world of work. By taxing labor performed by robots in the same way that we tax the labor performed by humans, there could be a disincentive to replace human labor with machines or use the tax funds to reinvest in worker training programs or finance high-value care jobs that currently pay low wages. Because it is difficult to define what type of automation could be taxed, it has been criticized as difficult to implement. Political philosopher Michael Sandel has suggested something similar, but for high-speed trading.
- Progressive Taxation: The idea of progressive taxation is that individuals should pay taxes in proportion to their spending power—if there was a flat tax rate, there would be a higher burden on those who earn the least. This system creates tax brackets, which in 2020 was a maximum of 37% for those who earn more than $518,000. President-elect Biden has proposed increasing the tax rate for individuals who earn more than $400,000, moving the maximum rate to 39.6%. The top-income tax rate peaked during World War II at 92%, dropping to no lower than 70% for the next several decades.
- Death Taxes: This form of tax is similar to the wealth tax, but concerns the transfer of assets after an individual is deceased. The estate tax is federal tax of up to 40% of the value of assets for an estate that exceeds $11.4 million dollars, although some states have their own separate taxes and thresholds. The inheritance tax is levied by 6 states — including Maryland, Nebraska, and New Jersey — and is paid by the person who inherits assets from a deceased friend or family member, with exemptions for spouses. Billionaires like Warren Buffett have been vocal in their support of these taxes, which can reduce the accumulation of capital among the wealthiest families.
- Wealth Tax*: Most of us learned about the wealth tax concept from Elizabeth Warren and Bernie Sanders’ respective presidential campaigns. Their proposal would have created a new progressive federal tax on net wealth (assets minus debt) for any individual with wealth upward of $30 million. This type of tax has had limited success in some European countries for several reasons: properly evaluating the value of assets is very resource-intensive, wealth can be hidden, and some wealthy individuals ended up leaving the country.
The Floor Approach
- Federal Minimum Wage: The first federal minimum wage was established in 1938, under the direction of Labor Secretary Frances Perkins, in an effort to mandate employers with more bargaining power than their workers to pay a fair wage. The law does not apply to tipped workers—they were completely exempt until 1966 when the rate was set to $2.13 per hour, 50% of the minimum wage at the time, where it remains in 2020—or independent contractors. Because the minimum wage is not regularly adjusted for inflation as it is in other developed countries, the current rate of $7.25 has a lower purchasing power than it did in 1968 and would not be enough to rent at 2 bedroom apartment in any state.
- Right To Unionize: The National Labor Relations Act (NLRA) was another New Deal era law, which guaranteed the right to join a union and collectively bargain. Union membership grew in strength in the 40s and 50s—peaking at 34% of private-sector employees in 1954—raising wages for lower income workers by around 20%. Union strength has declined in recent decades, due in part to the difficulty of organizing workers in more geographically dispersed locations and the proliferation of Right-to-Work laws, which prevent unions from requiring dues. Currently only 6.2% of private-sector workers belong to a union.
- Supplemental Nutrition Assistance Program (SNAP): Formerly called the Food Stamps program, SNAP offers supplemental funds that can be used in grocery stores and convenience stores for individuals or families that are below a specific threshold of monthly net and gross income. Around 9% of American households used SNAP benefits at some point in 2017. The program is typically well-regarded as resource efficient and has had a positive impact on child health and recidivism rates of individuals released from the prison system. Unless exempt, the program has work or training requirements.
- Earned Income Tax Credit (EITC): Added to the tax code in 1978, the EITC provides refundable tax credits to supplement the earnings of low-income workers. It is structured to incentivize work, with the tax credit initially increasing along with earnings (thus encouraging more work), before reaching a plateau before a gradual decline. The EITC and Child Tax Credit (which provides a tax credit based on the number of dependent children) together were reported to lift over 9 million people above the poverty line in 2013.
- Negative Income Tax*: Some are surprised to learn that free-market capitalist Milton Friedman — the same man who said that the only social responsibility of a business is to increase profits — proposed a negative income tax in 1962. Friedman thought the tax could alleviate poverty by compensating workers who earn an amount lower than an acceptable income threshold. Doing so would simplify the existing welfare system, but still tie the receipt of benefits to employment.
- Universal Basic Income (UBI)*: UBI is a universal, unconditional and recurring cash transfer payment paid to individuals. The advantages of UBI are that 1) its unconditionality can remove stigma from receiving welfare assistance and 2) it has the potential to replace a patchwork of paternalistic assistance programs and 3) pilots have shown benefits including reduced stress, improved health, and even increased entrepreneurial behavior. Vox has a useful article that reviews every UBI experiment from around the world.
But Don’t People Earn What They Deserve?
Now that I’ve outlined the various ways that income and wealth are redistributed, let’s quickly think about whether the government should play a role in this at all. Isn’t the distribution of resources the role of a market?
My view on this is very much aligned with political philosopher Michael Sandel, who makes the argument that what we may perceive as merit or talent has much more to do with luck than most of us recognize.
Some people do work harder than others, but what’s reflected in the vast income inequalities that we’ve seen in recent years is not hard work primarily. School teachers work hard, bus drivers work hard, kindergarten teachers, daycare workers — they work hard. Do they work less hard than hedge fund managers and Wall Street bankers who reap hundreds and thousands of times what they do in the market economy?
Most of the wage differences, most of the income differences have very little to do with differences in effort. Most of them have to do with supply and demand and with the qualities that our society happens to value, and a lot of this is no doing of the people who are lucky enough to have those talents and those abilities to wind up on top. And if that’s true, then it seems to me there is an obligation for those who are affluent, those who succeed under this system, to share their bounty with those who through no fault of their own are less well off.
Those that accumulate wealth might have worked hard, but that doesn’t automatically negate the efforts of every other hardworking person trapped in a cycle of poverty. There’s no such thing as purely individual success: we are surrounded by invisible support systems, from stable institutions to the provision of clean water. So, is it time to reverse the U?
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