On the heels of my exclusive Q&A with Chairman Paul Ryan, the House Budget Committee has released a 17-page, mega-response to the controversial Congressional Budget Office study on income inequality.
Read the whole thing. But here are some of the report’s big points:
1. Government often exacerbates inequality.
One underreported conclusion from the CBO study is that shifts in government transfers and federal taxes have contributed to increasing inequality over time. Both taxes and government transfers remain progressive, but the equalizing effect of transfers and taxes on household income was smaller in 2007 than it was in 1979. … For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers. This shift reflects a growth in programs that focus on the elderly population and are not income-adjusted, such as Social Security and Medicare.
2. Income snapshots can be misleading by ignoring income mobility.
The CBO took static snapshots of the income distribution at two different points in time, in this case 1979 and 2007. In examining these snapshots, it is clear that real income has grown significantly more for those at the upper end of the distribution than for those at the lower end over the past 30 years. Yet the CBO concedes that the dynamism of the American economy is not properly captured by this analytical approach. It is not the case that individual households remained fixed in the income distribution over this period. … This is an important distinction, as considerable empirical evidence has made clear that there is a significant amount of movement across income quintiles over time – in other words, there is a lot of income mobility in the U.S. economy. … One such recent analysis in the National Tax Journal examined individual tax returns from 1996 to 2005 and found that about 58 percent of households that were in the lowest income quintile in year one had moved up to a higher income segment ten years later.
3. Looking at relative inequality can be also be misleading.
Comparing just incomes over decades can also obscure the fact that broad living standards in the United States have risen sharply throughout its history. Average per capita net worth, for instance, has risen threefold over the past 30 years .
4. Income tax rates are not the problem.
For instance, the CBO found that average federal tax rates declined for all quintiles over the period studied, but, “The decline… was largest for those in the lowest income quintile, primarily because of increases in the earned income tax credit.” As mentioned above, these increases served to make the federal income tax more progressive. Another policy-related increase in the progressivity of the federal income tax occurred after the Tax Reform Act of 1986 (see Figure 8). According to the CBO, “The average federal income tax rate for the 1 percent of the population with the highest income… rose following enactment of the Tax Reform Act of 1986,” despite the fact that the 1986 law slashed the top rate from 50 percent to 28 percent. This is primarily because the 1986 reform broadened the tax base by eliminating numerous deductions and tax shelters primarily used by high-income households to reduce their tax liabilities.
5. Growth is the answer.
While entitlement reform and pro-growth tax reform speak directly to the CBO’s findings, policymakers must do more to promote broadly shared prosperity and economic growth. Streamlining job training programs, as proposed in the House-passed budget, would give more workers access to the kinds of mid-career educational programs that would help them keep up in a fast-moving, 21st Century global economy. Encouragement for school voucher programs would help lower-income parents find the educational alternatives that would help their children escape from failing public schools. And ending corporate welfare programs would strike a blow against a form of inequality that has unfortunately grown more pervasive over the past several years – an inequality that is based on political influence and bureaucratic favoritism.