Page 105 – Equitable Growth

Weekend reading: “The state of antitrust” edition

Posted on September 20, 2019September 20, 2019 by Maria Monroe

This is a post we publish each Friday with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth published this week and the second is relevant and interesting articles we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Criminal antitrust filings and civil nonmerger actions have fallen in the United States, while U.S. GDP growth has outpaced growth in antitrust appropriations, writes Michael Kades in a new report on the state of U.S. antitrust enforcement. Kades looks at the number and type of cases brought by enforcers at the Federal Trade Commission and the U.S. Department of Justice’s Antitrust Division, the resources Congress provides for antitrust enforcement, and the merger filing-fee system that has become the primary source of funding for federal antitrust enforcement.

Just as the Federal Reserve cut interest rates for the second time this year, Somin Park warns that super-low interest rates may actually harm economic growth by reducing competition and investment. In a post detailing the findings of a new working paper, Park writes that a drop in interest rates can have one of two effects: one in which firms ramp up investment to raise productivity and expand market power to gain higher future profits (good for the economy), and one in which the productivity gap between a leading firm and its industry competitors grows so wide that investment from both sides dries up (not good for the economy). The authors of the working paper posit that whether the first or the second effect takes place may depend on how low interest rates are to begin with, before they are lowered even further.

Equitable Growth President and CEO Heather Boushey testified before the House Budget Committee this week on “solutions to rising economic inequality.” Her testimony covered long-term challenges facing the U.S. economy, such as increasing inequality and decreasing mobility, how such trends hurt economic growth and productivity, and concluded with policy solutions to tackle these systemic problems.

Economic inequality and monetary policy are indeed closely linked, writes Somin Park, even if inequality doesn’t overtly relate to the Federal Reserve’s dual mandates of maximum employment and price stability. Reviewing the recent literature on the topic, Park shows that inequality and monetary policy affect one another through various and important means—and, as such, inequality should be a consideration for the Fed in order to maximize the effectiveness of its monetary policy.

Heather Boushey details in Politico Magazine why it’s important for federal policymakers to understand how the fruits of economic growth are distributed up and down the income ladder in the United States. In her piece for Politico’s “How to Fix Politics” feature in Inequality, Boushey calls for Congress to fund the work by the U.S. Bureau of Economic Analysis to disaggregate economic growth so that policymakers can “conceptualize and analyze economic progress” as a “vital step toward better, fairer growth.”

Links from around the web

The Federal Trade Commission announced an investigation into Amazon.com Inc’s Marketplace, interviewing sellers to determine whether the company is dampening competition from smaller merchants, report Spencer Soper and Ben Brody for Bloomberg. The interviews, lasting about 90 minutes each and conducted by a team of attorneys and an economist, suggest “a serious inquiry rather than investigators merely responding to complaints and going through the motions,” say Soper and Brody. The probe is part of a larger effort by the antitrust agencies—the FTC and the Justice Department’s Antitrust Division—looking into how big tech companies such as Amazon, Facebook.com Inc, and Alphabet Inc.’s Google unit control the U.S. economy.

What is the future of work? The AFL-CIO believes it includes a four-day, 32-hour workweek, thanks to changes in technology and innovation that have increased the productivity of the labor force, writes Alexia Fernández Campbell for Vox. Researchers at the largest federation of labor unions in the nation say that shortening the workweek has two major benefits: It redistributes work hours to the millions of underemployed workers in the labor force, and it can actually make workers more productive and reduce the likelihood of burn-out. Other research supports these claims as well. So, will we see three-day weekends in the future? It may not be as far-fetched as it seems, considering that until labor law reforms in 1940, Americans worked up to 100 hours per week over six days.

Speaking of the future of work, it appears that the gig economy may not be “it” anymore, writes Neil Irwin for The New York Times. While app-based employment seemed to be everywhere in the not-too-distant past, California’s new law requiring gig economy employees to be treated as conventional workers—signed by Gov. Gavin Newsom (D) this week—shows just how limited the gig economy may be. Plus, a growing economy has opened up more traditional opportunities for workers, meaning app-based work may become even more niche. In fact, most people these days use gig economy jobs to supplement their more traditionally earned income. “As the gig economy matures,” Irwin concludes, “it is becoming clear that every trend has its limits.”

The debate is heating up over Sen. Elizabeth Warren’s (D-MA) proposed wealth tax, writes John Cassidy for The New Yorker, as it is the first one released by a viable presidential candidate in decades. Cassidy covers the possible advantages as well as the controversies surrounding the proposal, which would levy a 2 percent tax on wealth greater than $50 million and tax 3 cents on every dollar of wealth exceeding $1 billion—potentially bringing in $2.75 trillion over 10 years, according to Sen. Warren’s campaign.

Friday Figure

Figure is from Equitable Growth’s “The state of U.S. federal antitrust enforcement,” by Michael Kades.

Equitable Growth event highlights Boushey’s new book Unbound about how inequality obstructs, subverts, and distorts economic growth

Posted on September 20, 2019September 20, 2019 by Maria Monroe

Drawing lessons from data and the need to rebuild governing institutions to address structural problems in the U.S. economy were key themes at the Washington Center for Equitable Growth’s most recent Research on Tap event to mark the release of Unbound: How Inequality Constricts Our Economy and What We Can Do About It, by Equitable Growth’s President and CEO Heather Boushey. She was joined by economists Atif Mian from Princeton University, Sandra Black from Columbia University, and policy expert Angela Hanks for a conversation about her new book. The event was moderated by Binyamin Appelbaum of The New York Times.

Unbound lays out the latest cutting-edge research to show how economic inequality obstructs, subverts, and distorts the processes that boost productivity and output and offers solutions to promote economic growth that is strong, stable, and broadly shared. In a conversation with Appelbaum, Boushey explained that new empirical techniques and data allow economists to show that markets don’t work for the benefit of people across the income and wealth distribution without the governing institutions that serve to constrain economic inequality.

Mian and Black, drawing from their experience in academia, discussed what the research in economics tells us about how inequality affects the economy. Mian explained that empirical evidence challenges standard economic theory and the notion that there is a clear tension between economic equity and economic growth. One premise from standard theory that is borne out by the data is that as inequality rises, there are more savings available for investment, as richer individuals tend to save more. A prediction that follows is that as aggregate saving increases, investment should also go up. Investment in the United States, however, has declined over time.

Mian’s answer to this puzzle—examined in his book House of Debt with Amir Sufi at the University of Chicago’s Booth School of Business—is the financialization of the economy in the run-up to the 2007 financial crisis. With a lot of money looking for a place to go, credit became more easily available and was used to fund consumption among lower-wealth households. Mian and Sufi’s work on credit-driven economic growth and how it both increases economic instability and leads to lost economic opportunity shows one of the key ways that inequality distorts the macroeconomy, as explored in Unbound.

Columbia’s Black discussed research showing that there is remarkable intergenerational persistence in income and wealth in the United States, despite the idea of the nation being the land of opportunity. In her research looking at the outcome of adoptees that disentangles genetic and environmental factors, Black finds that wealth transmission occurs not primarily because children from wealthier families are inherently more talented, but rather that wealth begets wealth and all its advantages. Her research is important because economic inequality obstructs the supply of talent and ideas, as wealthy families monopolize the best educational, social, and economic opportunities. Those with fewer resources are left behind and locked out.

Hanks, deputy executive director of the Groundwork Collaborative, argued that in the policy sphere, looking at data is important and also essential to help translate the problems identified in economics into policy. Using data to accurately reflect people’s challenges is critical because failing to communicate the magnitude of problems in the U.S. economy leads to a failure to develop commensurate solutions to address them.

Black, a member of former President Barack Obama’s Council of Economic Advisers, also discussed her experience of the challenges of bringing academic ideas into policy. When policymakers and advisors limit themselves to what has been fully demonstrated by the evidence, policy tends to be incremental because much of the research itself is incremental. Policies on issues such as wage boards or improvements to unions can get overlooked, since there is limited research and evidence.

The panelists each spoke about the political challenges of addressing economic inequality. Mian posited that the challenge is not having to establish consensus in academia that economic inequality matters, but rather is a political one. He argued that the message about economic inequality has not been powerful enough to reach voters and prevent them from voting against their own interests.

Why is there a communications failure? To this question posed by Mian, Black pointed to a key idea explored in Unbound—inequality subverts democracy and the policymaking process because the economic elite have political power and control the political narrative. Boushey added that much of the public discourse focuses on misguided arguments about markets versus government, when, in fact, the two must coexist—with rules and institutions that support a well-functioning market.

One policy idea emblematic of this insight at the top of Mian’s wish list is the importance of providing equitable endowments to ensure that all families have the necessary resources to thrive, as part of a structural shift needed in the U.S. economy. The top priority for Hanks and Black is addressing outsized power at the top of the income and wealth distributions. Boushey noted that to make the U.S. economy more equitable and stronger, policies to increase opportunity for all and policies to redistribute income and wealth—via higher taxes—are not in contention with one another and should, in fact, go together. What is important, she said, is to reshape the way we think about the policy agenda and build an economy that delivers strong and broad-based gains.

Testimony by Heather Boushey before the House Budget Committee

Posted on September 19, 2019October 16, 2019 by Maria Monroe

Heather Boushey
Washington Center for Equitable Growth
Testimony before the House Budget Committee,
Hearing on “Solutions to Rising Economic Inequality”

September 19, 2019

Thank you, Chairman Yarmuth and Ranking Member Womack, for inviting me to speak today. It’s an honor to be here.

My name is Heather Boushey and I am President and CEO of the Washington Center for Equitable Growth. We seek to advance evidence-backed ideas and policies that promote strong, stable, and broad-based economic growth.

The United States is experiencing the longest economic expansion in our history. The economy continues to add jobs month after month and the unemployment rate remains historically low. But unlike in past expansions, the strong headline jobs numbers have not translated into strong wage gains for workers. Instead, the benefits of the economic recovery are disproportionately accumulating to the already wealthy. The well-being of working- and middle-class families has become detached from economic growth as those at the top of the income and wealth ladders capture more and more of those gains. Over the past four decades, earnings for low- and middle-income Americans have grown slowly—or not at all—while incomes and wealth have surged at the top.

The latest economic research from across the disciplines shows the many ways that high economic inequality—in incomes, wealth, and across firms—serves to obstruct, subvert, and distort the processes that lead to widespread improved economic well-being. In short, the evidence increasingly points to the conclusion that today’s high concentrations of economic resources are constricting economic growth. Yet, our nation has spent decades systemically undermining the capacity of institutions that were set up to contain and constrain economic inequality. This has made it impossible for the market to work as advertised. The current situation cannot provide a path forward for strong, stable, and broadly-shared income gains across the income distribution.

Policymakers can preserve the best of our economic and political traditions, and improve on them, by pursing policies that can both reduce economic inequality and boost growth. The most critical steps are those that limit inequality’s ability to constrict our economy and tackle the ways that the concentration of economic resources translate into political and social power. Core to this agenda is the need to rebalance the power between those who have access to resources and those who do not. I encourage you to think about the structural effects by focusing specifically on:

Building inclusive, broad-based, and diverse institutions representing the voices of working- and middle-class families
Policies that directly boost incomes at the bottom
Market structure and competition
Promoting fairness in who pays taxes
What policymakers both do with the revenue they have and what they must do to cope with too-little revenue.

As a first step, I encourage you to redefine the goal—to focus not on the stock market, headline jobs numbers or just Gross Domestic Product, but on ensuring that economic growth reaches Americans across the income spectrum.

In my testimony, I will first review the longer-term economic challenges facing the U.S. economy, including rising inequality and falling mobility. I will then turn to the ways in which economic inequality hurts growth and productivity and offer a series of solutions to combat the problem of systemic and growing inequality.

The rise in income and wealth inequality

Families across our nation aren’t feeling the benefits of growth in their daily lives and many national economic statistics are becoming less representative of the experience of most Americans. The implication for how policymakers and economists alike evaluate the economy is that average economic progress is pulling away from median economic progress. We see these same divergent trends across multiple measures of economic wellbeing: wages, income, and wealth.

Prior to the 1980s, economic growth was equitably shared between most Americans. But we are now in a new economy, which is both growing slower than in the past and where growth mostly accrues to those at the top of the economic ladder. Incomes for the working-class and the middle-class families have grown slowly for decades while incomes at the very top have exploded.

Since 1980, GDP growth (an incomplete measure, as I discuss below) has been slower overall—growing at an annual pace of 1.3 percent compared to 1.7 percent in the three decades before. From 1980 to 2016, those in the top one percent saw their incomes after taxes and transfers rise by more than 180 percent, and those in the top 0.001 percent saw their incomes grow by more than 600 percent. Meanwhile, those in the bottom half saw only a 25 percent rise, find economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. To be very clear, this data show that only those at the very tippy top have had truly sizeable gains during this period.¹ (See Figure 1, on page 3.)

Other research confirms the large growth in inequality since 1980. Last week, the U.S. Census Bureau released estimates showing that in 2018 the top 5 percent of income earners took home almost as much of our national income as the bottom 60 percent (23.1 percent compared to 25.5 percent). They also show that U.S. inequality, as measured by the Gini Coefficient, remains near record highs, having grown steadily since 1980.²

Prior to this period, there was little need to separate out or “disaggregate” national growth because the headline GDP growth statistic was broadly representative of most Americans. Unfortunately, that is no longer the case.

GDP growth has been treated for decades by pundits and policymakers alike as synonymous with prosperity. President John. F. Kennedy famously alluded to it when he said that “a rising tide lifts all boats.” In the decades since, economists and commentators have used the metaphor of “growing the pie” to indicate that we should first and foremost be concerned with growing the economy rather than concerning ourselves with who gets a slice. But as Figure 1 demonstrates, overall growth of the economic pie is no longer correlated with prosperity for many Americans. Representative Carolyn Maloney has a proposal to make GDP growth representative of all Americans again, which I discuss later in my testimony.

The unequal distribution of income exhibits inequalities by gender and race as well. Those that occupy the highest rungs on the income ladder are much more likely to be male and white, which means that women and people of color are less likely to have access to the economic and political power that higher incomes confer. The U.S. Census Bureau reports that 32 percent of white households earn $100,000 or more—about double the 16.7 percent for black households. Conversely, more than one in 8.7 black households earns less than $15,000, compared to fewer than one in 19 white households.³

Figure 1

Inequality of Wealth

Income is the flow of money while wealth is the stock of accumulating assets—money, but also property, stocks, bonds, and other kinds of capital. The distribution of wealth across U.S. households is even more severely unequal than income.⁴ Research by Saez and Zucman documents that in the 1920s, the share of wealth owned by the top 1 percent of households by wealth was 51 percent. As with the share of income owned by the top 1 percent, this fell during the middle of the 20th century by more than half, hitting a low of 23 percent in 1978. Since then, however, wealth gains at the top have grown even faster than income—those in the top 1 percent now control 42 percent of all wealth and the top 0.1 percent control more than 22 percent of all wealth in the U.S. economy, three times as much as a generation ago. This amounts to 160,000 families owning a collective $11.7 trillion. In 2018, this group’s share of wealth was equal to that of the bottom 90 percent of Americans.⁵ (See Figure 2.)

Figure 2

The Federal Reserve Board’s new Distributional Financial Accounts also show that wealth is strongly concentrated, with 10 percent of the population holding 70 percent of all wealth in the United States in 2018. The bottom 50 percent of wealth owners experienced no growth in net wealth since 1989. Meanwhile, the top 1 percent saw their wealth grow by almost 300 percent since 1989. Although cumulative growth of wealth was relatively similar among all wealth groups through the 1990s, the top 1 percent and bottom 50 percent diverged around 2000. (See Figure 3.)

Figure 3

Economic inequality and the fall in economic mobility

Moving up the economic ladder and earning more than the previous generation is at the heart of “the American Dream,” still an ideal that many Americans cherish. But groundbreaking research now shows that inequality is hindering upward absolute mobility, obstructing people from moving up as the rungs of the ladder grow further apart.

Harvard University economist Raj Chetty and his co-authors looked across generations and found that when people born in 1940 were in their prime work-age years, nearly all—92 percent—had an income that was higher than their parents had at the same age. But when those born in 1980—the Reagan-era children—hit their 30s, only half had an income higher than their parents had at the same age. Middle-income Americans have experienced the largest decline in economic mobility.⁶ Looking across the income spectrum, the researchers found that 70 percent of the decline can be explained by the rise in inequality. We could only close 30 percent of this “mobility gap” by raising growth alone. (See Figure 4.)

Figure 4

Inequality limits opportunity for those not already at the top. Everyone needs some measure of capital to start up a business, to give a child a college education, or to take care of sudden medical emergencies. Yet increasingly only the very wealthy have the means to do so without risking their future livelihoods by going into serious debt. In this way we can see that inequities in income and wealth can replicate themselves across generations. Solving falling economic mobility will require tackling economic inequality and all the ways it harms our economy.

Economic inequality is bad for the economy

Inequality constricts growth by:

Obstructing the supply of people and ideas into our economy and limiting opportunity for those not already at the top, which slows productivity growth over time
Subverting the institutions that manage the market, making our political system ineffective and our labor markets dysfunctional
Distorting demand through its effects on consumption and investment, which both drags down and destabilizes short- and long-term growth in economic output

Inequality obstructs the supply of talent, ideas, and capital

The economic circumstances that children are born into affect children’s development in everything from their health to their ability to focus at school to their educational opportunities, and these, in turn, affect their economic outcomes as adults. Research by economists shows the links between factors such as children’s varying birth weights and their different levels of school performance, job-holding, and earnings as adults relative to others with similar skill sets.

Even when children have access to skills, inequality obstructs their contributing to the economy to the best of their abilities, and these obstructions hinder productivity and growth. Research led by Harvard’s Chetty measured what is more important to earning a patent later in life: scoring high on childhood aptitude tests or parental income. Disturbingly, the richer the family, the more likely the child will be to earn a patent—far outweighing demonstrated intelligence. If a child who shows aptitude early on cannot climb the income and wealth ladder, then there’s something broken in the way our economy works. Inequality has blocked the process and, as result, drags down national productivity by making our workforce less capable than it could be and our economy less innovative.

Inequality subverts the institutions that manage the market

Growing inequality is subverting the public institutions and the policymaking process we need to support our economy. It discourages a focus on the public interest and promotes the efforts of firms to accrue larger profits than truly competitive markets would allow.

Today, firms are able to manipulate the functioning of the marketplace because economic inequality gives their owners the financial wherewithal to wield political influence. By exerting pressure on political processes, they can minimize the taxes on firms, owners of capital, and top-salaried workers. And they can rewrite laws and regulations in their favor. Research shows that lower taxes on those at the top of the income ladder do not lead to the kinds of beneficial outcomes some economists and policymakers suggest. The evidence is that when the rich pay less in taxes it encourages them to act in unproductive ways. (See Figure 5.)

Figure 5

When a firm has too much power in its product or services market, it has monopoly power, which means it can raise prices with impunity and stymie competition. Indeed, our economy is increasingly dominated by a few firms in many industries. In healthcare markets, the biggest healthcare companies are increasing their stronghold by merging and then charging higher prices, which in turn leads to higher profits for managers and shareholders alongside less affordable—and sometimes lower quality—healthcare for everyone else. It also means lower wages for those working increasingly in what economists call “monopsony labor markets,” where there’s only one or a handful of employers in a given market, giving these firms outsized wage-setting power. What’s happening in health care is emblematic of changes across our economy.

By subverting our economy in various ways, inequality undermines confidence that institutions of governance can deliver for the majority. But for the economy to function, the public sector needs to function, and function well. In the 19th and 20th centuries, the U.S. government implemented policies that launched many families with a solid financial foundation, including the Homestead Act, the estate tax, universal primary and secondary schools and land grant colleges across the nation, and the GI Bill. These policies weren’t perfect and were discriminatory in multiple ways, but they showed that the federal government could embark on big agendas to reduce inequality. Today, however, inequality in wealth and power is thwarting the government from taking on collective endeavors that provide the foundation for broad-based economic growth while promoting the interests of monopolists and oligopolists over others.

Inequality distorts both consumption and investment

Inequality distorts everyday decision-making by consumers and businesses. These outcomes are evident at the macroeconomic level. People’s spending drives business investment as consumers account for nearly 70 cents of every dollar spent in the United States. But for the past several decades, U.S. families in the bottom half of the income distribution have seen no income gains, and the gains for those families not among the top 10 percent of income earners have been meager. This means that if firms were to invest more, they may not be able to sell additional goods and services because consumers might not be in positions to buy them.

Many businesses, eyeing demand, have understandably not invested much over this period. U.S. firms are sitting on record-high piles of cash, which have been steadily accumulating since the 1980s.⁷ Others have found customers willing to purchase their wares, but only because of the financially unstable expansion of household debt—as seen especially in the run-up to the Great Recession in the middle of the last decade, and as is occurring again today.⁸ Growing economic inequality thus destabilizes spending because everyday consumers either don’t have enough money to spend or are borrowing beyond their means to buy what they need.

Inequality is even driving changes in what firms are producing, with a number of economic implications for innovation and even inflation. Xavier Jaravel at the London School of Economics finds that businesses are investing in new products targeted at high-end consumers while developing fewer products for those in the lower end of the market. For those at the low end, there’s less competition for their business, which means lower productivity, lower innovation, and higher prices and inflation. This shows up in the data: Jaravel found that between 2004 and 2013, families with incomes greater than $100,000 per year saw yearly prices rise by 0.65 percent less than for families earning below $30,000 in the respective bundles of goods that those families bought.

With consumption dragged down by flagging middle-class incomes, too much money in the hands of those at the top, and investors sitting on the sidelines, conditions are ripe for an increase in the supply of credit. The deregulation of the financial sector over the past 40 years has made it easier to lend to U.S. households—in no small part due to the influence of the financial services industry. Empirical research and the U.S. experience over the past several decades show the consequences of these distortions and how credit-driven economic growth both increases economic instability and leads to lost economic opportunity.

Solutions for economic inequality

Policymakers can preserve the best of our economic and political traditions, and improve on them, by pursing policies that can both reduce economic inequality and boost growth. The most critical steps are those that limit inequality’s ability to constrict our economy and tackle the ways that the concentration of economic resources translate into political and social power. The solutions start with addressing the subversions caused by inequality, which then creates the opportunity to remove obstructions and limit distortions in the broader economy. The market cannot function to benefit most Americans if it’s being subverted by the economic power of a small group at the top of the economic ladder.

Measure what matters

To properly design policy, lawmakers need the right measurement tools, otherwise they might be tempted to pass laws that raise average outcomes without actually helping families across the income spectrum. Yet many of the statistics we rely on to inform us about the state of our economy are measures of the mean and, in an era of rising inequality, are becoming less informative about the experience of the majority of people you represent.

To address this, Congress should require the U.S. Bureau of Economic Analysis to release growth data that is broken down by income group each quarter alongside Gross Domestic Product. By focusing less on an unrepresentative average for the U.S. economy and instead on how income gains are distributed, policymakers can ensure that no one is left behind, regardless of their zip code or demographics.

H.R 707, The Measuring Real Income Growth Act, introduced by Representative Carolyn Maloney, would disaggregate quarterly or annual GDP growth numbers, telling us how much of that growth accrued to low-, middle-, and high-income Americans. This would provide policymakers with a new tool to track the progress of the economy, evaluate how past policy is changing our economic fortunes, and guide future economic decision-making.

Increase bargaining power for workers

Policymakers must ensure there’s a bulwark against concentrated economic power by improving workers’ ability to bargain with employers over pay and working conditions. Civic institutions, especially unions, that once served as voices for everyday wage-earning workers have suffered a long decline. Unions were traditionally the most vocal and ardent advocates for the middle class, but now only 1 out of every 15 private-sector workers belongs to a union. In the early 1950s, a third of private-sector workers did.

New ideas for how to revitalize the U.S. labor movement and strengthen worker bargaining power abound. These include:

Making it easier for workers to organize a union, including through reforms to the collective-bargaining process and stiffer enforcement and penalties for employers who violate the law
Extending union contracts to non-union workers, a process that is widely used in similar countries and called sectoral bargaining
Structurally incorporating unions into the policymaking process
Making union membership the default status for many workers
Allowing unions to manage public benefits, such as unemployment insurance
Privileging firms that cooperate well with unions in government contracting and other arenas
Launching a global agreement modeled on the Paris Climate Accord that explicitly targets higher unionization rates

Any of these policy proposals could improve U.S. workers’ ability to bargain with employers over pay and working conditions.⁹

It’s no accident that, back when unions were strong, the fruits of U.S. economic growth were more broadly distributed to unionized and non-unionized workers alike. Solutions will require not only reinvigorating civic institutions—be they in formal unions or other kinds of worker solidarity organizations—but also addressing how the legal landscape has become increasingly hostile to non-corporate civic engagement. Business associations and their allies in politics pushed through so called “right-to-work” laws that restrict collective bargaining, and have filed serial successful lawsuits designed to cripple unions’ ability to fund their activities. Restoring balance will require rethinking these policies.¹⁰

Increase the minimum wage

Increasing the minimum wage is vital to raising living standards at the bottom of the income spectrum and for the most disadvantaged workers. Research indicates that higher minimum wages helps workers in a multitude of ways, by lowering the poverty rate, increasing earnings for low-wage workers, and decreasing public expenditures on welfare programs.¹¹

The minimum wage also plays an important role in decreasing earnings disparities for disadvantaged groups. The expansion of the federal minimum wage to cover additional industries in the 1966 Federal Labor Standards Act explained 20 percent of the reduction in the black-white wage gap during the Civil Rights era. And the poverty rate for black and Hispanic families would be around 20 percent lower had the minimum wage remained at its 1968 inflation-adjusted level and not been allowed to languish and atrophy for years.¹²

Previous generations of economists were concerned that minimum wage increases could harm employment, but there is ambiguous or no evidence for this conjecture. New, high-quality research concludes that raising the minimum wage increases incomes at the bottom without costing jobs—whether that research examined administrative data sources that follow workers over several years,¹³ conducted meta-analysis of 138 different minimum wage increases,¹⁴ or examined the U.S. cities that have pushed their minimum wages higher than any others.¹⁵

Address monopoly power

The U.S. economy is increasingly dominated by a fewer firms, meaning higher profits for shareholders but higher prices and lower wages for typical U.S. families—especially as workers face monopsony labor markets in which firms have the power to set low wages. There must be rules that ensure that those with the most economic power cannot subvert the market to benefit themselves at the expense of workers and consumers. Congress needs to clarify that antitrust laws protect competition—in all of its forms, not simply where it affects consumer prices. In cases of uncertainty, the laws should favor competition over concentration.

Attending to the issue of monopsony would be a new and crucial step for antitrust regulators. As a way to start, policymakers should consider how mergers affect labor markets. A merger between two companies that are ostensibly in different markets (and thus would be swiftly approved) might in fact be anticompetitive because they compete for the same employees.¹⁶

On top of everything else, in recent decades federal antitrust enforcers have not had the resources they need to do their job of preventing anticompetitive consolidation. Since 2010, the number of requests for merger reviews filed at the two federal antitrust agencies has increased by more than 50 percent, but appropriations to the agencies that enforce the antitrust laws have fallen precipitously in real terms. (See Figure 6.)

Figure 6

Not surprisingly, despite the wave in mergers, there has been no increase in merger enforcement. Research shows that merger enforcement has narrowed its focus to mergers at the highest levels of concentration and permitted more consolidation. Between 2008 and 2011, there were exactly zero enforcement actions taken for mergers that would result in more than four significant competitors in the industry. Congress should ensure that enforcers have the resources they need to do their jobs.¹⁷

Tax wealth

It is clear what kinds of policies will worsen all the trends discussed here. The Tax Cuts and Jobs Act of 2017 was sharply regressive, with high-income families enjoying larger tax windfalls in both the short- and long-term than low- and middle-income families.

Proponents claimed the new tax law would boost wages by $4,000 per year.¹⁸ But there is no evidence to suggest such an increase is coming. Despite the already strong economy, inflation-adjusted wage growth has been moderate at best in the nearly two years since the law was passed. Proponents claimed that the law would lead to a boom in business investment in things such as factories and technology, but the modest increase in investment in 2018 relative to trend was primarily the result of fluctuations in oil prices.¹⁹ Investment has already declined from that modest level in 2019. Instead, it is clear that corporations have used their tax windfall to give out a record $1 trillion-plus in stock buybacks in 2018.²⁰

Policymakers have room to raise taxes at the top of the income ladder and, indeed, empirical analysis indicates that this will likely have economic benefits above and beyond raising revenue. The top marginal income tax rate is now less than half what it was in the mid-20th century, which has allowed individuals at the top to accumulate wealth and power far beyond what previous generations of wealthy Americans could amass. Nobel Prize winning economist Peter Diamond and Saez found that the United States could have approximately doubled the tax burden on the top 1 percent of income earners in 2007, and that “would still leave the after-tax income share of the top percentile more than twice as high as in 1970.”²¹

Given that the top one percent controls more than 40 percent of U.S. wealth, and these fortunes have been amassed in part by utilizing tax shelters and preferential rates only available to the truly well-off, one avenue to focus on is how to tax wealth more and better. (See Table 1.)

First, capital gains taxes are too easy to avoid. Under current law, capital gains and losses are taxed only when the gain or loss is realized, generally when the underlying asset is sold. Some assets are passed on to heirs at death and are never taxed. Instead, lawmakers could implement a system of mark-to-market taxation where investors would pay tax on the increase in the value of their investments each year. Switching to a system such as this would equalize the tax treatment of income from labor and income from capital, making the tax system more progressive, efficient, and fair. It could even include a high exemption so that it only applies to the truly well-off.

Second, policymakers could make it harder for corporations to avoid taxation by shifting income across international borders by moving to either a destination-based tax system or imposing a global minimum tax (higher than the one imposed in the Tax Cuts and Jobs Act of 2017).

Third, federal lawmakers could impose a new net worth tax on very wealthy individuals, which could function similar to net worth taxes in other countries and be a more comprehensive version of the property taxes levied on the state and local level. Because wealth is so unequally distributed, a tax with a very high exemption could still raise hundreds of billions of dollars for needed investments.²²

Table 1

Enable all children to thrive at an early age

Investments in people—through education, training, and care—are as important to the economy as physical capital, something that economists have recognized since the 1960s. Today, we need a national commitment not only to ensure equal access to primary and secondary school but also to end unequal access to early childhood education and care. Early childhood education must be paired with a sensible policy on childcare. The primary source of federal funding for childcare subsidies for low-income working families is the Child Care Development Fund, but this reaches only about one in six eligible children. Ideas for improving access to childcare include expanding subsidies to ensure that no family pays more than a reasonable share of its income—perhaps seven percent. Reforms should also be paired with measures to improve the wages of childcare workers, and in doing so boost the quality of that care.²³

Congress can address some of the well-documented inequities in child health, mortality, and basic resources by making sure that programs such as SNAP, Medicaid, WIC are protected from cuts and work requirements. Work requirements have been shown by research to lower the effectiveness of these programs by, among other things, burying participants in red tape and confusing eligibility requirements.

Allow workers to manage their lives

Over the course of their careers, most workers will experience a life event—whether it is a serious personal medical issue, the birth of a child, or the need to care for a loved one who is ill—that they will need to address outside of work. But currently, the Family and Medical Leave Act of 1993 falls far too short, providing unpaid leave to only 60 percent of workers. Paid leave provides the right to time off with pay so that workers can continue to cover the electricity bill and put food on the table while they focus their attention on addressing their needs or the needs of their family members. Six states have put in place statewide paid-family-leave programs (and soon the District of Columbia), which ensure that any parent, not just one at a high-income level, can spend time with a new baby or a seriously ill child and have income support.²⁴ These existing models are replicable on the federal level.²⁵

Further, most low-income parents do not have access to the work-life scheduling policies and support they need to address conflicts between work and caring for young children. Modern retail and warehousing scheduling practices are not the inevitable consequence of technological change or market necessities. Rather, employers are using new scheduling technology as a tool when they engage in a well-documented phenomenon in the labor market called “risk shifting.” As worker bargaining power has weakened and American ideas about individual responsibility have changed since the 1970s, employers have increasingly shifted economic risk from business owners and shareholders to workers. This “risk” is often thought of as changes to worker compensation and job security, but changes in scheduling practices also are a key dimension of risk shifting.

Today, employees’ schedules are highly responsive to employers’ perceptions of the ebbs and flows of consumer demand. As a result, their schedules are irregular and unpredictable. When employers treat workers as widgets to be used or discarded erratically, what are the consequences for worker well-being? Economists Danny Schneider at the University of Cailfornia, Berkeley and Kristen Harknett at UC-San Francisco show that just-in-time schedules are associated with psychological distress and poor sleep, while other research points to unpredictable scheduling harming workers’ children’s outcomes.²⁶ ²⁷

Sustainable and productive investment

Policymakers should make greater investments in large-scale projects, such as upgrading the nation’s failing transportation infrastructure, addressing climate change, and investing in people and families. These projects encompass traditional investments in water and transportation as well as developing the technology to limit the emission of greenhouse gases and to address the consequences of climate change. There’s a comprehensive agenda to be enacted to make investments in the development and deployment of green energy, in mitigating the adverse effects of climate change on our food supplies, and to assist communities upended by the rising prevalence of climate change-induced natural disasters.²⁸

Without additional revenue, government cannot make these critical investments and the public knows that public investments are important and lacking. A majority of Americans say that poorly maintained schools are a threat to our children, and a majority think that all Americans are endangered by the poor quality of our drinking water infrastructure.²⁹ A Harvard-Harris Poll in 2017 found, more emphatically, that 84 percent of Americans want to invest more in infrastructure, and 76 percent agree that government should be at least partially responsible for that investment.³⁰ Governments, within reason, need to spend and regulate to encourage growth, not simply cut and run. The long-term decline in revenue has starved resources that can be directed to critical public investments.

Conclusion

When we start from a focus on who gains from rising economic prosperity, we see that rising economic concentration in income, wealth, and firms constricts growth and productivity by obstructing access to those not already at the top, subverting the institutions that manage the market, and destabilizing the macroeconomy through distorting both consumption and investment. This Committee has a vital role in resetting our national policies and making sure that our economy is not longer bound by inequality. Thank you for again allowing me to testify on this topic today.

Economic inequality matters for Federal Reserve monetary policymaking

Posted on September 17, 2019September 18, 2019 by Maria Monroe

After the U.S. Federal Reserve cut interest rates at the end of July, Fed Chair Jerome Powell suggested that inequality concerns influenced the decision when he underscored the importance of sustaining the economic expansion to reach “those left behind.” Powell’s concern is in line with the evidence showing that monetary policy affects income and wealth inequality, and rising inequality affects the effectiveness of monetary policies. Researchers and central bankers alike are increasingly calling for inequality concerns to play a central role in shaping Fed policy.

Economists have studied how monetary policy affects the distribution of income and wealth. A paper by University of Texas at Austin economist Olivier Coibion and his co-authors finds that expansionary monetary policies (lowering the benchmark interest rate) from the Fed reduce income and consumption inequality across households, while contractionary monetary policy shocks (by raising that benchmark rate) increase income and consumption inequality. The contrasting effects are primarily due to the differences in the composition of incomes and household balance sheets across the U.S. income distribution.

Other recent research from three economists at the International Monetary Fund that looks at 32 economies over recent decades supports these findings. In Confronting Inequality: How Societies Can Choose Inclusive Growth, Jonathan D. Ostry, Prakash Loungani, and Andrew Berg find that an unanticipated 100 basis-point decline in the interest rate lowers the Gini measure of inequality by 1.25 percent in the short term and by 2.25 in the medium term. The labor share of income rises, while the shares of income going to the top 10 percent, 5 percent, and 1 percent all fall. They conclude that there is clear-cut evidence that unanticipated, or exogenous, monetary policy easing lowers income inequality.

Economic inequality also affects the transmission of monetary policy to the U.S. economy in several ways. Wealthier households tend to have a lower marginal propensity to consume, meaning that low-income households will spend more of an extra dollar. Research by Stanford University economist Adrien Auclert shows that differences in marginal propensities to consume have an important impact on how interest rates affect aggregate demand. The stimulative effect of monetary policy is amplified when it shifts income toward individuals who are more likely to spend it—lower-income individuals and holders of debt.

Another way that inequality affects the effectiveness of monetary policy is through households’ access to financial markets and indebtedness. Because low-income households tend to have limited access to banks or financial markets, a change in the distribution of income affects who will be most affected by and more responsive to changes in interest rates. A household’s income and indebtedness profile also influence how it responds to a change in monetary policy. Research shows that the transmission of monetary policy is more effective for middle-class households that are more indebted and have adjustable interest rates on their debts.

Traditionally, economic inequality hasn’t been a primary concern to central bankers when it comes to monetary policy decisions. Liviu Voinea of the National Bank of Romania and Pierre Monnin of the Council on Economic Policies note that the decades-old dogma that central banks need not be concerned with income and wealth inequality was put into question following the global financial crisis, when many central banks used unconventional monetary policies to contain the economic fallout. Some economists argued that unconventional policies, such as quantitative easing (when central banks buy government bonds or other financial assets), would worsen wealth inequality because they boost asset prices more than the standard change in interest rates and because asset distribution is highly skewed toward wealthier households. In an ongoing debate, others argue that quantitative easing had positive distributional effects.

The jury’s still out on the effect of unconventional policies on economic inequality, but it’s clear that the distributional consequences of monetary policy are important to consider. Even if some Fed policymakers see inequality as irrelevant to their dual mandate of maximum employment and price stability, they still should pay attention to income and wealth inequality to maximize the effectiveness of monetary policy.

Low interest rates can dampen competition and hurt productivity growth

Posted on September 16, 2019September 16, 2019 by Maria Monroe

U.S. interest rates hovered near zero for 7 years after the Federal Reserve slashed rates in 2008 during the Great Recession, with a gradual series of rate hikes then carrying the federal funds rate to 2.5 percent. At the end of July, the central bank made its first rate cut in more than a decade to sustain the economic expansion amid signs of a slowing global economy and rising trade frictions. Yet—against the backdrop of a wide global decline in long-term interest rates since the 1980s—new research suggests that very low interest rates could, in fact, hurt economic growth by reducing competition and investment.

A working paper from economists Ernest Liu and Atif Mian at Princeton University and Amir Sufi at the University of Chicago’s Booth School of Business connects the dots between interest rates, investment, and market competition to offer an explanation for the decline in productivity growth, which has characterized the U.S. economy since the early 2000s. The three co-authors’ model suggests that very low interest rates can reduce industry competition, investment, and overall productivity growth in the economy.

They develop a model in which a decline in interest rates has two main effects. First, all firms ramp up investment to raise productivity and gain market power in order to reap higher future profits. They term this the “traditional effect.” Second, the productivity gap between a leading firm and its industry competitors grows because the leader’s incentive to invest is stronger. The widening gap discourages the lagging rivals from investing, meaning that the industry becomes increasingly monopolistic. Liu, Mian, and Sufi call this the “strategic effect.”

When interest rates are very low and fall toward zero, the strategic effect is stronger than the traditional effect because industries are more monopolistic. The leading firm’s competitors stop investing as they fall too far behind and the prospect of catching up to the leader becomes weaker. The leader also stops investing once the threat of being overtaken by competitors becomes too small. And when this occurs across industries, the overall productivity growth of the economy falls.

To be sure, when interest rates are high, a decline in interest rates boosts economic growth initially—the traditional effect is stronger than the strategic effect. But rate cuts when interest rates are “sufficiently low,” the co-authors say, dampen growth. So, what do they consider a sufficiently low interest rate—one below which the anti-competitive effect dominates? This threshold rate is not directly observable. But Liu, Mian, and Sufi suggest that it is possible to identify a lower bound by looking at interest rates below which a fall in the rate has a stronger impact on the value of the leading company than on its competitors.

A number of other studies also show that a fall in long-term interest rates is associated with higher industry concentration, higher markups, and higher corporate profits alongside a decline in business dynamism. Recent research from New York University economists Germán Gutiérrez and Thomas Philippon finds that U.S. business investment since the early 2000s has remained disproportionately low compared to profitability measures, arguing that decreasing competition could explain about one-half of the investment gap. Investment is critical to economic growth.

There is an ongoing, fundamental debate in economics about what kind of market conditions promote investment-driven innovation. On one side are the ideas of the American Nobel laureate Kenneth Arrow, who argued that a monopolist has less incentive to invest and generate disruptive innovation. On the other side are the ideas of the famous Austrian economist Joseph Schumpeter, who argued that larger firms had more incentive and ability to innovate.

Liu, Mian, and Sufi’s model suggests that firms initially have more incentive to invest due to the higher future payoff in profits, as argued by Schumpeter. Yet once the productivity gap between them and their smaller competitors is wide and once the marginal gain of strengthening their market position is lower than the investment cost, they become “lazy” and invest less, as Arrow’s ideas would suggest.

Economic inequality distorts investment and economic growth in multiple ways. Using Mian and Sufi’s previous work on the Great Recession, Equitable Growth President and CEO Heather Boushey argues in her forthcoming book, Unbound: How Inequality Constricts Our Economy and What We Can Do About It, that rising economic inequality, combined with financial deregulation of the early 2000s, led to a rise in the supply of credit—leading to unstable growth and eventually to a deep economic crisis. This new study by Liu, Mian, and Sufi introduces interest rates into the equation and improves our understanding of how market concentration affects the U.S. economy and stymies competition.

Weekend reading: the “U.S. Census Bureau data” edition

Posted on September 13, 2019September 13, 2019 by Ed Paisley

Equitable Growth round-up

Median household income has not changed in a statistically significant way between 2017 and 2018, writes Alix Gould-Werth in an analysis of this week’s U.S. Census Bureau release of the 2018 poverty rate and 2018 median household income in the United States. While the official poverty rate went down 0.5 percent, finally returning to its pre-Great Recession level, median household income has not improved significantly relative to 2007. A more nuanced look at the data shows that overall economic hardship did not decrease in 2018—despite an increase in Gross Domestic Product over the same time period—thanks to growing income inequality. This means millions of families are vulnerable to falling into poverty again when the next recession inevitably hits.

As wealth inequality grows, ideas about how to raise taxes on that wealth abound. In an issue brief, Greg Leiserson and Will McGrew outline a system of mark-to-market taxation, which changes the way we currently tax investment income such that investors would pay tax on the increase in the value of their investments each year, rather than deferring tax until those investments are sold. The brief reviews the revenue potential of this taxation system and summarizes the distribution of the resulting burden, which would fall overwhelmingly on wealthy individuals.

The U.S. Bureau of Labor Statistics this week released the July data from the Job Openings and Labor Turnover Survey, or JOLTS. Kate Bahn and Raksha Kopparam produced four graphs using the data, which demonstrate an expansionary labor market even as job openings decreased slightly in July.

Read Will McGrew’s coverage of last month’s sixth annual Freedom and Justice Conference—hosted by the National Economic Association and the American Society of Hispanic Economists at University of New Mexico’s Department of Economics—which focused on better incorporating those who are economically marginalized into the field of economics, both as researchers and as subjects of research.

Equitable Growth announced more than $200,000 in funding for two grants studying the effects of state-level paid family and medical leave on labor market participation and on opioid abuse. The two off-cycle grants will study issues “that matter to families and that also have profound implications for the labor market and broader economy,” said Alix Gould-Werth in a press release.

Brad DeLong gives us his latest worthy reads, providing his takes on content from Equitable Growth and around the web.

Links from around the web

During President Donald Trump’s second year in office, safety net programs—including the Supplemental Nutrition Assistance Program, Social Security, and housing subsidies—and the benefits they provide to low-income families kept almost 48 million people out of poverty. That’s close to 3 million more people above the poverty threshold than in 2017, reports Alexia Fernández Campbell for Vox, analyzing the newly released U.S. Census Bureau data on poverty and median income. Yet, she continues, repeated efforts to slash welfare spending—including President Trump’s budget proposal for fiscal year 2020 and attempts to disable Obamacare—will only push more people into poverty, should they succeed.

Since 2009, the rate of uninsured people living in the United States has been declining, largely thanks to the Affordable Care Act and the creation of state healthcare exchanges in 2014. But in 2018, that progress halted, as almost 2 million more people became uninsured, bringing the total to 27.5 million Americans living without healthcare coverage—including more than 4 million children—reports Tami Luhby for CNN.

After the California state legislature passed landmark legislation on Wednesday changing the employment status of app-based company employees, companies such as Uber Technologies, Inc. and Lyft, Inc.—which are some of the main targets of the law—responded by declaring they were exempt from key provisions, leading to confusion about who, exactly, will be covered once it goes into effect. Under the law, workers are considered employees (with all the rights, benefits, and protections that implies), and not contractors, if a company controls how they perform their tasks or if their work is central to a company’s regular business. So, if this law doesn’t affect Uber and Lyft drivers, then who does it apply to? The ensuing debate “could have wide economic ramifications for businesses and workers alike in California, and potentially well beyond as lawmakers in other states seek to make similar changes,” write Kate Conger and Noam Scheiber for The New York Times.

For the first time in history, write Heather Long and Andrew Van Dam for The Washington Post, most new hires of prime working age (ages 25 to 54) in the United States are people of color. Specifically, black and Hispanic women—who have been entering the workforce at an increasing rate since 2015—have reshaped the workforce and pushed it across this historic threshold. But, the authors ask, will these minority groups be able to hold on to these gains when the labor market weakens as the economy slows down?

Attorneys general for 50 states and territories—only California and Alabama have not signed on—announced an antitrust investigation into Alphabet Inc.’s Google unit, stopping short of filing a lawsuit for the time being. The probe is focused on the tech giant’s online advertising, though could expand to other areas, including “the way the company processes and ranks search results to the extent to which it may not fully protect users’ personal information,” writes Tony Romm for The Washington Post. This investigation comes as regulators around the world are looking into the company’s practices, including investigators in the European Union, who recently fined Google $9 billion for competition-related issues over the past 3 years.

Friday Figure

Figure is from Equitable Growth’s “Newly released U.S. poverty statistics show that recent economic growth is not broadly shared,” by Alix Gould-Werth.

Brad DeLong: Worthy reads on equitable growth, September 6–13, 2019

Posted on September 13, 2019 by Ed Paisley

Worthy reads from Equitable Growth:

Diverse scholars at conferences ask different questions—questions as, if not more, important than the mainstream. Will McGrew reports on this year’s “National Economic Association and the American Society of Hispanic Economists Work to Diversify and Strengthen Economics Research,” writing: “Last month, the National Economic Association and the American Society of Hispanic Economists hosted the sixth annual NEA-ASHE Freedom and Justice Conference at University of New Mexico’s Department of Economics. As in previous years, this conference provided an invaluable contribution to the field by elevating new communities, topics, and methodologies within economics research. Indeed, the papers presented at the conference painted a fuller picture of the current state of the U.S. economy and provided empirically grounded recommendations for a stronger and fairer economic future.”
Very good advice for California now—and for future congressional majority leaders and speakers and presidents who might represent the large majorities of American voters who want these problems addressed sensibly and substantially. Read Heather Boushey’s “Equitable Growth CEO’s Written Testimony at California Future of Work Commission,” in which she writes: “The monopoly power problem … exacerbates inequality, contributes to wage stagnation, limits entrepreneurship, increases the cost of living, and stifles innovation … Industry concentration and declining economic dynamism reduces wages by limiting workers’ employment options and opportunities for advancement, and allows firms to use their increasing power to squeeze worker compensation in favor of greater profits. Workplace fissuring, through the rise of independent contractors, franchisors, and contingent hiring, prevents workers from accessing career ladders, matching into the jobs they are best suited for, and gaining sufficient bargaining power to unlock wage increases. Persistent historical disparities such as wage discrimination and social norms reinforce occupational segregation into jobs that don’t pay well enough and offer little room for advancement. Yet policymaking over the past several decades has been moving in the wrong direction. Specifically: Antitrust law now allows firms to accrue and abuse monopoly power, not just over consumers but also in many cases over workers. Successive rounds of tax cuts, including the Tax Cuts and Jobs Act of 2017 and several tax cuts under the George W. Bush administration, have lowered the progressivity of the tax code and greatly decreased taxes on wealth, capital, inheritances, and corporate profits. Outdated labor law provides insufficient protection of workers and has facilitated the long decline of unions, traditionally the most vocal and ardent advocates for the middle class. We have an opportunity right now to take a step back to look at the scale and scope of the problems and develop real solutions.”
These two are Equitable Growth’s not-so-secret but very powerful intellectual weapons on issue of public finance. Read Greg Leiserson and Will McGrew, “Taxing Wealth by Taxing Investment Income: An Introduction to Mark-To-Market Taxation,” who write: “The sharp increase in U.S. wealth inequality in recent decades has spurred interest in increasing taxes on wealth. This issue brief introduces mark-to-market taxation, one approach to raising taxes on wealth by reforming the taxation of investment income. In a system of mark-to-market taxation, investors pay tax on the increase in the value of their investments each year rather than deferring tax until those investments are sold, as they do under current law. This issue brief first defines investment income and explains how mark-to-market taxation works. It then reviews the revenue potential of this approach to taxing investment income, explaining why a mark-to-market system can raise substantial revenues. Finally, it summarizes the distribution of the burden that would result, which would fall overwhelmingly on wealthy individuals.”

Worthy reads not from Equitable Growth:

Listen to a conversation between Reed Hundt and me about the “limits of, and challenges to, free-market economics,” with Joshua Cohen, co-editor of Boston Review, “Neoliberalism and Its Discontents,” which is prefaced on the web pages of the host of the discussion, the Commonwealth Club: “At the end of the Carter administration and throughout the Reagan Revolution, belief in the power of markets became America’s preferred economic policy doctrine. President Bill Clinton all but announced the triumph of free markets when he declared that ‘the era of big government is over.’ President Barack Obama faced the worst economic crisis since the Great Depression and pushed a recovery plan that was more limited than many had hoped, seeming to protect the very sectors that had created it … In his new book, A Crisis Wasted, Reed Hundt … makes the argument that Obama missed an opportunity to push for a new progressive era of governance, a miscalculation that ultimately hobbled his administration.”
A more sophisticated model says that the 2 percentage point drop in the Wicksellian equilibrium real interest rate due to the coming of the low interest rates of “secular stagnation” should have triggered a 2 percentage point increase in the Federal Reserve’s inflation target. I think this is probably right. It mirrors the conclusion of a less-sophisticated model—one in which proper policy simply seeks to keep inflation as low as is consistent with not exceeding a fixed small probability of hitting the zero lower bound on interest rates. Read Philippe Andrade, Jordi Galí, Hervé Le Bihan, and Julien Matheron, “The Optimal Inflation Target and the Natural Rate of Interest,” in which they write: “Starting from pre-crisis values, a 1 percentage point decline in the natural rate should be accommodated by an increase in the optimal inﬂation target of about 0.9 to 1 percentage point.”
The interest rate is an optimal-control variable. Almost always, in an optimal control problem—like in steering a boat—you are doing one of two things: as much as you can (wheel hard left or hard right), or staying the course (wheel center, unsure whether your next move will be to nudge it left or right, but certainly your next move will be small). Only when something special is going on—like following a narrow channel or passing a reef—do you tend to deviate from that rule. The Fed knows that its next move is highly likely to be a rate cut. I see no reef. I see no island. Why has the rate cut not happened already? What is the reason? Read Tim Duy, “Gearing Up For A Rate Cut,” in which he writes: “One take on the numbers is fairly positive. The economy continues to generate jobs at a pace sufficient to either lower unemployment further or encourage more people to enter the labor force. The jump in wage growth might even suggest that the economy is finally bumping up against full capacity and that is the primary culprit behind slower job growth. And maybe the August jobs number is revised up. Another take is less positive. The job market has clearly slowed, and, after accounting for the [U.S.] Census [Bureau] hires, may have slowed very close to the point where unemployment at best holds steady. That significant downshift in momentum is very worrisome. The second derivative here is not our friend. Moreover, don’t take too much comfort in the stronger wage numbers, as that can easily be a lagging variable; wages might not take a hit until unemployment starts rising … [Gross Domestic Product] tracking measures from the New York and Atlanta Federal Reserve Banks are both at a below trend 1.5 percent for the third quarter. New York is looking at 1.1 percent growth for the fourth quarter. Most definitely nothing to write home about.”

Newly released U.S. poverty statistics show that recent economic growth is not broadly shared

Posted on September 11, 2019September 11, 2019 by Ed Paisley

The U.S. Census Bureau yesterday released the 2018 poverty rate alongside information on the 2018 median household income in the United States. The takeaway? Things are not improving that much. Looking across all households, median household income was not statistically different in 2018 from what it was in 2017. (See Figure 1.)

Figure 1

But what about looking at the most economically vulnerable members of society specifically? Taking a closer look at the bottom of the income distribution, the official poverty rate decreased 0.5 percentage points. This is good news, especially if you rely on the official poverty measure.

Yet the official poverty measure isn’t a great gauge of the actual hardship people face—it simply multiplies the 1963 cost of nutritionally adequate food for the year by three, indexes it to inflation, and then sees how a household’s cash income before taxes stacks up against that number. In 2018, the poverty threshold for a four-person household was slightly more than $25,000.

The Supplemental Poverty Measure is more nuanced. This measure, first used by the Census Bureau in 2011, is based on expenditures on food, clothing, shelter, and utilities rather than just food. It takes into account the regional cost of living. And, when adding up a household’s resources, this measure considers gains and losses from taxation, noncash benefits such as government-provided housing and food assistance, and expenses such as child support payments, medical expenses, and work expenses.

This more nuanced look at economic hardship shows no significant change from 2017 to 2018. That means that, on average, things were the same in 2018 as they were in 2017 both for U.S. households on average and for people in poverty, according to this more nuanced measure.

This type of stagnation is what economists and policymakers might expect in the context of a slow-growing economy. But 2018 was a bang-up year for the United States as a whole: The U.S. Gross Domestic Product increased by 2.9 percent! The Census Bureau’s poverty numbers, however, indicate that the fruits of growth are not reaching those on the brink of poverty. Indeed, this is part of a larger trend—since 1980, U.S. economic growth has disproportionately accrued to the households at the top of the income distribution, leaving others behind.

It’s also important to put these figures in more recent historical context. From the end of 2007 to 2009, the United States experienced its most severe recession since the Great Depression, and poverty rates spiked. From 2009 until today, the United States has experienced the most prolonged economic expansion in history. Yet, the median household has not seen significant improvement in income levels relative to 2007, and the poverty numbers are just now recovering to where they were on the eve of the Great Recession.

While it sounds good to reach pre-recession poverty levels, the picture of poverty prior to the recession wasn’t particularly rosy. Today, as then, more than 1 in 10 people living in the United States are officially poor, and this is a lower bound for economic hardship—a far greater number of people than those officially classified as poor are unable to put food on the table or are unable to get the medical care they need because they lack the money needed to do so. It is shocking that economic hardship is so prevalent in a wealthy nation in the midst of an expansion.

What’s more, economic expansions don’t last forever. Another recession is inevitable, which means policymakers should anticipate that poverty rates will spike again. It is wonderful that fewer people in the country are experiencing economic hardship today than were during the Great Recession and its aftermath. Real people experienced real pain during that time. But we shouldn’t conflate the amelioration of pain with progress. When it has taken nearly a decade for people at the bottom of the income distribution to get back to the starting line they were at in 2007, and when they are likely to be pushed backward again by a recession in the near future, that is not progress. That is struggling to keep up.

Though the numbers released by the U.S. Census Bureau yesterday don’t tell a story of progress, they do tell a story of policy successes. Looking at the Supplemental Poverty Measure, the data show that—holding all else constant—Social Security benefits lifted 27.3 million people out of poverty. Similar calculations show refundable tax credits such as the Earned Income Tax Credit lifting 7.9 million people out of poverty and the Supplemental Nutrition Assistance Program and housing subsidies each lifting about 3 million people out of poverty. Our social safety net is catching people. In fact, it is catching millions of people.

The numbers released yesterday paint a picture of a society in which economic gains are not reflected in the paychecks of its most economically vulnerable people, but where the social safety net offers some crucial assistance. Policymakers should take a hard look at these numbers and think carefully about labor market and tax interventions that can facilitate a broader sharing of economic growth. They should also note that in the absence of these changes—or, better yet, as a complement to them—an expansion, or at least a maintenance of social safety net programs, protect people who fall prey to the vagaries of the market.

Equitable Growth CEO’s written testimony at California Future of Work Commission

Posted on September 11, 2019September 11, 2019 by Maria Monroe

Unbound: How Inequality Constricts Our Economy
Heather Boushey
California Future of Work Commission
September 10, 2019

On Sept. 10, 2019, Heather Boushey, president and CEO of the Washington Center for Equitable Growth, participated in a discussion hosted by California Gov. Gavin Newsom as part of his Future of Work Commission. Below are her written remarks.

We are currently experiencing the longest economic recovery in U.S. history, but the gains from that economic growth—the money in peoples’ pockets—aren’t being shared. That hurts families and the long-term trajectory of our economy.

The top-line economic markers signal to policymakers that our economy is growing—indicators such as a historically low unemployment rate and annual Gross Domestic Product growth of around 2 percent—and that real wage growth has begun to pick up in recent months. But it’s also true that wages are not growing commensurate with a tight labor market and that the fruits of our economic growth, in terms of both income and wealth, are diverging sharply.

The Federal Reserve Board’s new Distributional Financial Accounts and the latest research by University of California, Berkeley economists Emmanuel Saez and Gabriel Zucman document that income inequality is historically high, and wealth inequality is outpacing it.³¹

Inequality hurts economic growth and mobility. Growth has slowed since 1980, and average people no longer share in the growth we do have. The bottom 50 percent of the population has the same inflation-adjusted pretax income that they did in 1980, and lower absolute mobility means that people born in 1980 now have only a 50 percent chance of surpassing their parents’ income.³²

Inequality constricts growth by:

Obstructing the supply of people and ideas into our economy and limiting opportunity for those not already at the top, which slows productivity growth over time
Subverting the institutions that manage the market, making our political system ineffective and our labor markets dysfunctional
Distorting demand through its effects on consumption and investment, which both drags down and destabilizes short- and long-term growth in economic output

Emblematic of these impediments to more broad-based economic growth today is the monopoly power problem—one that exacerbates inequality, contributes to wage stagnation, limits entrepreneurship, increases the cost of living, and stifles innovation. This affects the U.S. labor market in three interconnected ways:

Industry concentration and declining economic dynamism reduces wages by limiting workers’ employment options and opportunities for advancement, and allows firms to use their increasing power to squeeze worker compensation in favor of greater profits.
Workplace fissuring, through the rise of independent contractors, franchisors, and contingent hiring, prevents workers from accessing career ladders, matching into the jobs they are best suited for, and gaining sufficient bargaining power to unlock wage increases.³³
Persistent historical disparities such as wage discrimination and social norms reinforce occupational segregation into jobs that don’t pay well enough and offer little room for advancement.

Yet policymaking over the past several decades has been moving in the wrong direction. Specifically:

Antitrust law now allows firms to accrue and abuse monopoly power, not just over consumers but also in many cases over workers.³⁴
Successive rounds of tax cuts, including the Tax Cuts and Jobs Act of 2017 and several tax cuts under the George W. Bush administration, have lowered the progressivity of the tax code and greatly decreased taxes on wealth, capital, inheritances, and corporate profits.
Outdated labor law provides insufficient protection of workers and has facilitated the long decline of unions, traditionally the most vocal and ardent advocates for the middle class.

We have an opportunity right now to take a step back to look at the scale and scope of the problems and develop real solutions. We need an economic policy agenda that supports families and builds a strong economy. Policies must fit the scale and scope of today’s problems.

There are fast-growing jobs—in the provision of childcare and eldercare, in healthcare, and education, for example—that face a lower risk of worker displacement by technology. Yet workers in many of these jobs have little to no bargaining power and access to few benefits. In 2018, the median hourly wage for personal care workers in California was $11.80—significantly lower than the state median wage of $20.40. About 6 in 10 childcare workers in California earn so little that they qualify for public assistance.³⁵

The effect automation and artificial intelligence will have on workers are important challenges. But the way we as a society respond to them will be determined by the power arrangements in place in the labor market.

Workers’ voices need to be heard to balance the potential negative consequences of automation and AI. Worker input can shape the implementation of new technology, so that its consequences are more equitable for workplace dynamics and production processes, and help workers share in the gains of growth.

And fundamental to addressing abusive labor practices associated with the problem of fissuring in the workplace are the continual goals of the U.S. labor movement. These include higher minimum wages and union representation in addition to enforcement and expansion of workplace protections such as schedule stability protections, paid family and medical leave, and paid sick leave.³⁶

Policymakers should also design and fully embrace policies to eliminate discrimination in the labor market. Policymakers can start by measuring the structural problems—collecting firm-specific employment and pay data by gender, race, and ethnicity.

It is vitally important to think about the “future of work,” but we can and must prepare for the jobs of now.

Taxing wealth by taxing investment income: An introduction to mark-to-market taxation

Posted on September 11, 2019September 10, 2019 by Maria Monroe

Overview

The sharp increase in U.S. wealth inequality in recent decades has spurred interest in increasing taxes on wealth. This issue brief introduces mark-to-market taxation, one approach to raising taxes on wealth by reforming the taxation of investment income.³⁷ In a system of mark-to-market taxation, investors pay tax on the increase in the value of their investments each year rather than deferring tax until those investments are sold, as they do under current law. This issue brief first defines investment income and explains how mark-to-market taxation works. It then reviews the revenue potential of this approach to taxing investment income, explaining why a mark-to-market system can raise substantial revenues. Finally, it summarizes the distribution of the burden that would result, which would fall overwhelmingly on wealthy individuals.

Download File
Taxing wealth by taxing investment income: An introduction to mark-to-market taxation

What is investment income?

Investment income is income generated by wealth, including interest on a bond, dividends paid on a corporate stock, rents from real estate, and profits from a pass-through business such as a partnership. A pass-through business is one that “passes through” profits to its owners for tax purposes, who then pay income tax on those profits. In contrast, shareholders in a traditional C corporation do not pay tax on the corporation’s profits.

In addition to explicit payments and returns, investment income also includes increases in wealth that result from increases in the price of assets, such as increases in the price of stocks, bonds, real estate, or mutual fund shares. The income resulting from these price increases is known as a capital gain.³⁸ For instance, if an investor buys $100,000 of corporate stock and then sells it 1 year later for $110,000, then that $10,000 of income is a capital gain. Some assets, such as bonds, tend to generate income mostly in explicit payments, while other assets, such as stocks, tend to generate more income in capital gains.

Capital gains are a key form of investment income for U.S. households. Since 2009, capital gains have added $3 trillion to investment income each year, on average. Capital gains are also a much more volatile form of income than interest, dividends, and profits from pass-through businesses. They are the source of large losses in some years and large gains in others. (See Table 1 for a breakdown of the investment income of U.S. households and nonprofits, as estimated in the U.S. Integrated Macroeconomic Accounts, from 2013 to 2017. A portion of the total investment income received offsets the reduction in purchasing power that results from inflation. An estimate of the income necessary to offset inflation in each year is also provided in the table.)

Table 1

How is investment income taxed in the United States today?

The taxation of investment income varies dramatically across different types of assets.

Interest payments, dividends from corporate stocks and mutual funds, and rents are taxed when earned. Dividends and distributions from pass-through businesses, such as partnerships and S corporations, are largely exempt from taxation. Instead, as noted above, the owners pay tax on the profits of these businesses as those profits are earned.

Notably, to measure income more accurately and prevent tax avoidance, U.S. tax law requires many taxpayers to measure interest and profits as they accrue, not when money changes hands. Under the rules for what’s known as “original issue discount,” for example, an investor who owns a bond that does not pay interest on an annual basis must include in their income each year a portion of the interest that will eventually be paid as if it had been paid that year. Similarly, large businesses must measure profits, for tax purposes, according to the principles of accrual accounting, meaning they measure income when it is earned, not when it is received.

Interest payments are taxed at the same rates that apply to wages and most other sources of income (up to a maximum rate of 40.8 percent).³⁹ Rents and profits from pass-through businesses may be taxed at these rates or may be eligible for preferential tax rates introduced by the tax legislation enacted at the end of 2017 (up to a maximum rate of 33.4 percent). Dividends from corporate stock are generally eligible for an even more generous set of preferential rates (up to a maximum rate of 23.8 percent).

In contrast to the contemporaneous taxation of interest, dividends, and pass-through profits, capital gains and losses are taxed only when the gain or loss is realized, which generally means when the underlying asset is sold. The ability to delay paying tax on gains until an asset is sold is known as deferral. Suppose an investor purchases $10 million worth of shares in a nondividend-paying stock at the beginning of the year, holds them for 2 years, and then sells them for $12 million. The shares are worth $11 million at the end of the first year. The investor realizes no income and pays no tax on the investment in the first year and realizes $2 million of income and pays tax on that $2 million in the second year. In this example, the taxpayer has deferred $1 million of income from the first year into the second year. The computation of gains and losses in the tax code does not make any adjustments for inflation.

Capital gains on corporate stock held for 1 year or less (short-term gains) are taxed at the same rates applied to wages and other income (up to a maximum rate of 40.8 percent). Capital gains on corporate stock held for more than 1 year (long-term gains) are generally eligible for preferential rates (up to a maximum rate of 23.8 percent). Capital gains on other types of assets are subject to a variety of different rates. Collectibles, such as works of art, are taxed at a maximum rate of 31.8 percent, for example.

In addition to the complexity of the basic structure for taxing capital gains, additional preferences exist for certain types of gains. Any unrealized capital gains on assets held when a taxpayer dies are permanently exempt from taxation under a provision known as “step up in basis.” The basis of an asset is generally the cost of the investment in that asset, and the gain when sold is the sales proceeds less the basis. Under this provision, the basis for assets held at death is reset (stepped up) to the market value at death, which wipes out the gain for tax purposes. Another set of special rules allows taxpayers to swap one real estate asset for another similar asset—a so-called like-kind exchange—and defer the gain on the first asset until the second asset is sold.

Tax-advantaged pensions and retirement accounts also provide a substantially reduced rate of tax for investment income earned in these accounts. Contributions to pension funds and retirement accounts are limited under the law precisely because they offer this benefit. Owner-occupied housing is also tax preferred. Homeowners are not taxed on the implicit rent they pay themselves, and they may also exclude up to $250,000 ($500,000 for married couples) of capital gains on the sale of a primary residence.

The preferences for certain types of investment income, including the preferential rates, offer a direct benefit to investors. In addition, the complexity of these rules and the interactions between them open the door to a variety of tax avoidance strategies. Perhaps most notably, the realization system means that investors can delay paying taxes indefinitely by holding onto appreciated assets. They may be waiting for Congress to lower the capital gains rate or offer some other benefit, or simply holding the assets until they die, at which point the gains will be eliminated entirely through step up in basis when the assets are passed onto their heirs.

Taxpayers may also attempt to convert income that would be taxed at higher rates into capital gains so that it is eligible for the preferential rates. Owners of a closely held C corporation, for example, may pay themselves less in wages than they would absent tax considerations. This reduction in wages increases the value of the corporation, turning those wages into tax-preferred capital gains.⁴⁰

What is mark-to-market taxation?

Mark-to-market taxation is an approach to taxing investment income under which any increase in the value of a taxpayer’s assets is included in income each year. In other words, taxable income includes the full value of capital gains in the year they accrue, whether the gain is realized or not. As a result, a mark-to-market system of taxation treats capital gains in the same way interest, rents, and profits from pass-through businesses are treated under current law. In essence, adopting a system of mark-to-market taxation means repealing deferral. The name mark-to-market taxation comes from accounting, in which valuing an asset at its market value is known as marking to market. This type of approach is also sometimes known as accrual taxation. Figure 1 below illustrates the tax treatment of (a) interest under current law, (b) capital gains under current law, and (c) capital gains under mark-to-market taxation.

Figure 1

Three key design choices for a system of mark-to-market taxation are (1) the set of assets covered by the system, (2) the rate of tax to apply, and (3) whether to adopt special rules for dealing with volatility. We briefly discuss each of these choices.

First, under a mark-to-market system, taxpayers include capital gains in their income each year. This requires an annual valuation for each covered asset. The primary advantage of applying mark-to-market accounting to all assets is the reduction in tax avoidance opportunities resulting from a single, uniform system of taxation. Yet applying mark-to-market taxation only to a limited set of assets that are easier to value (potentially in combination with a deferral charge, as described below) may make compliance and administration easier.

Second, in principle, investment income could be taxed on a mark-to-market basis at any tax rate. But proposals to adopt mark-to-market taxation are often combined with proposals to raise the tax rate on capital gains. Applying the same rate to capital gains as to wages and other sources of income offers potential advantages by eliminating avoidance strategies that seek to convert income from the more heavily taxed type to the more lightly taxed type. In addition, one reason for adopting mark-to-market taxation is that it reduces the effectiveness of strategies used to avoid paying taxes. As a result, raising tax rates on capital gains raises more revenue if a mark-to-market system has already been adopted (or is adopted at the same time) than it would if enacted on its own.

Lastly, as noted above, capital gains are a more volatile source of income than interest and dividends. In some years, capital losses exceed capital gains. Thus, the treatment of losses under a mark-to-market system can be important. A more generous approach would allow losses to offset any other sources of income in the current year. A more conservative approach would allow unlimited loss carryforwards, meaning that a loss in the current year can be deducted against investment income in any future year but cannot offset noninvestment income in the current year. In an alternative scenario, taxpayers might include only a portion of their gains and losses in income each year, effectively implementing a form of income averaging.

If a comprehensive system of mark-to-market taxation is enacted, then there would be no unrealized gains at death going forward, because gains will have been taxed on an annual basis, including in the year the person dies. However, unless the system applies to gains accrued prior to enactment, there would still be unrealized gains on existing investments. Thus, proposals for mark-to-market taxation often also tax gains at death or when assets are given away—effectively repealing step up in basis—to ensure equal treatment across generations and raise additional revenue. Including taxation of gains at death or gift becomes even more important if the system exempts certain taxpayers, as discussed in more detail below.

Though not an essential feature of mark-to-market taxation, adopting a system of mark-to-market taxation also offers an opportunity to address other weaknesses of the tax code. Measures to limit the balances accumulated in tax-preferred retirement accounts, such as mandatory distributions for account balances above a certain threshold, and additional limitations on the capital gains exclusion for home sales would fit naturally within the context of a proposal for mark-to-market taxation of capital gains.⁴¹

What is a deferral (or lookback) charge?

A deferral (or lookback) charge is an additional tax payment imposed when an asset is sold after being held for more than 1 year to account for the fact that the gains on the asset were not taxed on an annual basis—in other words, that taxes have been deferred. Deferral charges are an alternative approach to limiting or eliminating the tax benefit of deferral, while still relying on realization as the trigger for tax liability. The primary advantage of a deferral charge system, relative to a mark-to-market system, is that it avoids the need to value assets on an annual basis, which may be difficult in certain cases.

Some proposals for mark-to-market taxation combine mark-to-market taxation of certain assets with deferral charges for other assets.⁴² In general, the mark-to-market system is applied to assets for which independent valuations are more readily available, such as a stock traded on a public exchange, and deferral charges are used for assets for which an independent valuation may not be as readily available, such as a privately owned business. These approaches aim to balance competing goals in designing the system. A mark-to-market system requires valuations for hard-to-value assets, while a deferral charge system creates opportunities for tax avoidance through exploiting differences in the tax resulting from the deferral charge and the tax that would have resulted from annual taxation of accrued gains and losses.

A variety of structures for deferral charges have been proposed in the academic literature.⁴³ Under one benchmark approach, the gain on an asset when sold is allocated in equal dollar amounts to each year between purchase and sale, the tax is computed on the income assigned to each year at the rate applicable in that year, and the unpaid taxes are accumulated with interest to compute the tax due. A closely related approach allocates the gain over the course of the investment’s lifetime assuming a constant rate of return rather than a constant dollar increase in value each year.

In addition, under a deferral charge system, unrealized gains would be deemed realized at death or when given away. Thus, all gains would eventually be taxed whether the assets are sold or not.

How could a mark-to-market system exempt middle-class taxpayers?

Mark-to-market taxation could be adopted as the universal approach to taxing investment income. Current proposals set forth by U.S. policymakers, however, have tended to apply the system only to wealthy taxpayers. Two approaches policymakers have suggested they might use for this purpose are a lifetime exemption on gains and an asset-based threshold for applying the tax.

Under a lifetime exemption approach, taxpayers would compute income under the mark-to-market system annually but would not pay tax on any mark-to-market gains or losses until they reach a cumulative amount of gains, such as $500,000, over their lifetime. This exemption could be used against mark-to-market gains, the interest portion of a deferral charge, and taxation of gains at death or when given away. But, under this approach, the exemption could not be applied against taxes due based on realized gains. Under the asset-based approach, taxpayers would only be covered by the mark-to-market system if their assets exceed a stated amount, such as $2 million.

A major difference between the asset-based approach and the lifetime exemption approach is that under the asset-based approach, taxpayers would enter and exit the mark-to-market regime multiple times if the value of their assets fluctuates. However, under the lifetime exemption approach, taxpayers are outside the regime until they have enough gains to be inside the regime and then remain inside the regime.

How much revenue could this type of tax reform raise?

The revenue potential of reforms to the taxation of investment income in the United States is large. Under current law, long-term capital gains and dividends are taxed at a 40 percent discount, relative to ordinary income. Moreover, tax planning strategies that take advantage of deferral, step up in basis, and other preferences for investment income mean that much investment income simply does not appear on tax returns at all.

Estimates of the revenue raised by reforms to the taxation of investment income are uncertain, as they depend on both the detailed specification of the tax and assumptions about how families would respond to the tax. But previous estimates suggest that mark-to-market reforms that also apply the tax rates on wage income to capital gains and dividends could easily raise $1 trillion over the next decade—and potentially much more, depending on how widely the higher tax rates are applied and what accompanying reforms are included.⁴⁴

The revenue potential from increasing the capital gains tax rate in isolation is likely much smaller. The ease of tax avoidance under current law, such as the ready opportunity to defer tax by not selling assets and potentially avoid tax entirely through step up in basis—all while simply borrowing against these same assets to finance any spending—means that taxpayers may substantially reduce realizations in response to an increase in the capital gains rate.

A recent Congressional Research Service analysis, for example, suggests that taxpayers might avoid as much as 50 percent of the tax liability that would otherwise result from a 5 percentage point increase in the capital gains rate through avoidance.⁴⁵ The report also highlights that some analysts might conclude that an even higher share of revenue would be lost through avoidance. Robust reforms to the tax base such as those discussed in this brief, however, would sharply limit these avoidance strategies and yield much higher revenues.

Who would bear the burden of a mark-to-market reform?

Reforms to the taxation of investment income such as those described above would be highly progressive. The economic incidence of these taxes—meaning the economic burden of the taxes, which is distinct from the legal obligation to pay them—would lie primarily on the owners of wealth.⁴⁶

Wealth ownership in the United States is highly unequal. The wealthiest 1 percent of families holds 31 percent of all wealth, and the wealthiest 10 percent holds 70 percent of all wealth.⁴⁷ (See Figure 2.) If policymakers include an exemption in the design of a mark-to-market system, the burden of the tax would be limited almost exclusively to high-wealth families.

Figure 2

Why might policymakers adopt mark-to-market taxation?

Reforms to the taxation of investment income could raise substantial revenues from the wealthiest families. The highest-income 1 percent of families receives 75 percent of the benefit of the preferential rates for capital gains and dividends under current law. Moreover, adopting a mark-to-market system would be a relatively efficient way to raise revenues, as the current system of taxing investment income allows wealthy taxpayers to avoid paying taxes by taking advantage of deferral, step up in basis, and other tax preferences. A mark-to-market system would scale back or eliminate these preferences and thus sharply reduce tax avoidance. Policymakers looking for a progressive tax instrument that raises substantial revenues would find mark-to-market taxation an appealing option.

Connect with us

Weekend reading: “The state of antitrust” edition

Equitable Growth round-up

Links from around the web

Equitable Growth event highlights Boushey’s new book Unbound about how inequality obstructs, subverts, and distorts economic growth

Testimony by Heather Boushey before the House Budget Committee

The rise in income and wealth inequality

Inequality of Wealth

Economic inequality and the fall in economic mobility

Economic inequality is bad for the economy

Solutions for economic inequality

Conclusion

Economic inequality matters for Federal Reserve monetary policymaking

Low interest rates can dampen competition and hurt productivity growth

Weekend reading: the “U.S. Census Bureau data” edition

Equitable Growth round-up

Links from around the web

Brad DeLong: Worthy reads on equitable growth, September 6–13, 2019

Newly released U.S. poverty statistics show that recent economic growth is not broadly shared

Equitable Growth CEO’s written testimony at California Future of Work Commission

Taxing wealth by taxing investment income: An introduction to mark-to-market taxation

Overview

What is investment income?

How is investment income taxed in the United States today?

What is mark-to-market taxation?

What is a deferral (or lookback) charge?

How could a mark-to-market system exempt middle-class taxpayers?

How much revenue could this type of tax reform raise?

Who would bear the burden of a mark-to-market reform?

Why might policymakers adopt mark-to-market taxation?

The promise of equitable and pro-growth tax reform

U.S. economic mobility trends and outcomes