Transitioning to BIG+VAT

John Quiggin raises some interesting questions about the BIG+VAT in the comments to the last post:

I’m unconvinced by your transition strategy, though of course the nature of a transition strategy depends on the starting point. I don’t see how a ‘small’ [UBI*], say $3000/person/r or $1 trillion per year in the US context let’s you eliminate any means tests, and it certainly doesn’t let you relax the conditionality of benefits.

By contrast, my proposed transition to the GMI works precisely by relaxing conditionality. In the US context, for example, you could remove term limits on welfare, make access to unemployment insurance easier, make early access to Social Security more favorable etc.

My version of the transition probably has tons of public choice problems that I’m not fully considering, inflection points where the short-term cost-benefit looks bad to the median voter, but I don’t think the GMI is better in this regard. As I see it, a small BIG+VAT is unconditional, itself, but leaves the current “conditionality” considerations for traditional benefits in place. Yet as the BIG grows, they can be eliminated.

If the starting VAT was 5% of consumer spending, then in 2008 it would have raised about $2500 per household, which is a little more than the Alaska Permanent Dividend. (The median household would pay exactly what it receives, and there would be no cap for luxury expenditures like there is for payroll taxes.) But part of what makes poverty is household size: the median US household is 2.6, but the lowest decile household is smaller, and has fewer wage earners. In general, then, poverty is not caused by spending more, but by earning less. We do prioritarian ethics a disservice when we pretend otherwise.

So, on a 5% VAT+BIG, a family of 2 living in the bottom decile would have $2500 more a year, no matter how much they earn. (I haven’t said this, but I imagine that this would be paid on a per-person basis, not per-household.) You can’t do much with that, but it’s a start: it’s about what foodstamps are worth (for a family of 2 living on less than $19,128) and about twice what low-income heating/cooling assistance pays, or roughly equal to LIHEAP plus Medicaid. At 10% VAT+BIG, you could start to phase those out, plus foodstamps, or (the incredibly restrictive) TANF completely. At 15% you can eliminate all of the above. At 25%, you’ve basically replaced the value of the federal means-tested benefits, which in the US right now is equal to about $12,000-$13,000.

I think that a truly just BIG would require about 30%-35% VAT+BIG, and in that case you could eliminate Social Security, as well. (Social Security is not actually a redistributive form of social insurance: it’s based on your income so rich people receive more and poor less. Phasing out the Social Security payroll tax would be great for workers of all incomes, but especially the least-advantaged!)

Of course, all along the way, you’ll be able to gradually reduce income taxes and means-tested programs, so I can readily imagine some inflection points where these reductions and gains are not linear. There’s all sorts of public choice hay to be made of those moments, and I’d be interested to think them through. What happens if the VAT+BIG ramps up 1% a year? What about 1/2% a year?

The Middle Class is Losing the Race for Second Place

I think about inequality a lot. But I also think about the middle class a lot, which isn’t quite the same thing. Generally, my sympathies lie with the “least advantaged” or “subaltern,” but I also feel the pull of the American cultural commitment to the middle class.

There can be little doubt that we are seeing a dissolution of the middle class, and this often seems a tragedy. Indeed, my favorite financial guru, Elizabeth Warren, put it like this:

“A middle class where people are falling out and into poverty is a middle class that has less room to bring people up and out of poverty.”

And yet, data going back to 1970 indicates that more people are failing to remain in the middle class due to wealth than due to poverty:

the entire reason the middle class has “shrunk” is that more households today have incomes that put them above middle class. That’s right, the share of households with income that puts them in the middle class or higher was 76 percent in 1970 and 75 percent in 2010—two figures that are statistically indistinguishable. For that matter, I am not discovering fire here; Third Way made the same point in early 2007 (page 7).

As Third Way put it in 2007:

The bottom line is that the middle class is shrinking but not because the bottom is dropping out; it is because more people are better off.

Now, let’s be clear: the two middle quintiles of income will always be populated by 40% of the population, so in some sense there will always be a “middle.” But increasingly this group will not be a class.

Alan Kreuger defines the middle class “as having a household income at least half of median income but no more than 1.5 times the median.” And the incomes statistics suggest that it is increasingly difficult to tread water this close to the median income: either you sink below it, or you rocket above it. But compared to 1970, more people are rocketing above it than sinking below it. (As Warren points out, this is largely a matter of women in the workforce: a couple with two incomes is too rich for the middle-class, and couples and single folks with only one income are too poor for it.)

Many different kinds of inequality compete for our attention when we discuss the politics of fairness. For instance, as Tyler Cowen has pointed out, the difference between the top 1% and the rest of the top quintile is largely what has driven the growing inequality over the last thirty years:

the share of pre-tax income earned by the richest 1 percent of earners has increased from about 8 percent in 1974 to more than 18 percent in 2007. Furthermore, the richest 0.01 percent (the 15,000 or so richest families) had a share of less than 1 percent in 1974 but more than 6 percent of national income in 2007. As noted, those figures are from pre-tax income, so don’t look to the George W. Bush tax cuts to explain the pattern. Furthermore, these gains have been sustained and have evolved over many years, rather than coming in one or two small bursts between 1974 and today.

But this inequality is distinct from the inequality that has afflicted the bottom 50% of the income spectrum:

At the same time, wage growth for the median earner has slowed since 1973. But that slower wage growth has afflicted large numbers of Americans, and it is conceptually distinct from the higher relative share of top income earners. For instance, if you take the 1979–2005 period, the average incomes of the bottom fifth of households increased only 6 percent while the incomes of the middle quintile rose by 21 percent. That’s a widening of the spread of incomes, but it’s not so drastic compared to the explosive gains at the very top.

And even this may conceal accounting effects and the inequality that emerges as the US population ages and some among us become better educated. It is at least plausible that there has been no meaningful growth in the inequality of the 99% at all:

Attacking the problem from a different angle, other economists are challenging whether there is much growth in inequality at all below the super-rich. For instance, real incomes are measured using a common price index, yet poorer people are more likely to shop at discount outlets like Wal-Mart, which have seen big price drops over the past twenty years. Once we take this behavior into account, it is unclear whether the real income gaps between the poor and middle class have been widening much at all. Robert J. Gordon, an economist from Northwestern University who is hardly known as a right-wing apologist, wrote in a recent paper that “there was no increase of inequality after 1993 in the bottom 99 percent of the population”, and that whatever overall change there was “can be entirely explained by the behavior of income in the top 1 percent.”

What we see, then, is a world where the rich have gotten much richer and the poor and median incomes have been relatively stagnant.

I agree with Cowen that the first trend is largely driven by financial engineering (“going short on volatility” and expecting a bailout when those bets don’t pay off) that appears to be negative-sum: the very richest get richer not through work but through arbitrage and winner-take-all approaches to the markets, and they do so by putting the brakes on the rest of the economy. In other words, the problem is financial capitalism, and it requires a response rooted specifically in managing the banking, insurance, and real estate sectors of the economy. (This is the so-called FIRE economy.)

But what about the second non-trend? The largely stable infra-99% inequalities somehow disguise the “dissolution of the middle class.” Or do they?

Game theorists like to joke about the “race for second place”: if the winner realizes she’s winning, she has to slow down, which creates a weird disequilibrilizing competition. In decision-theory, this is called “satisficing” and it is opposed to “maximizing.”

Tyler Cowen refers to people who satisfice on income as “threshold earners,” a group that I certainly belong to:

It is also the case that any society with a lot of “threshold earners” is likely to experience growing income inequality. A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to “get by” in terms of absolute earning power in order to experience other gains in the form of leisure—whether spending time with friends and family, walking in the woods and so on. Luck aside, that person’s income will never rise much above the threshold.

There is plenty of evidence that the richest quintile is full of people who have enough and are unwilling to work any harder to get more. Consider exhortations to “chill” that are quite popular among the upper-middle class.

abandoning the quest for the ideal in favor of the good-enough. It means stepping off the aspirational treadmill, foregoing some material opportunities and accepting some material constraints in exchange for more time to spend on relationships and experiences.

These are folks who were competing for second place, and, having rocketed out of the middle class, have chosen to take more time off. This behavior certainly expands the income inequality between the richest 1% and the rest of the top quintile. But should it bother us?

Now, we all satisfice, i.e. chill, all the time: even the serial entrepreneur satisfices on non-monetary goods: she has a “good enough” marriage, a “good enough” exercise routine, etc. But we’re not proud of this in the same way that so many Americans are proud about being middle class. We don’t all brag about how we get away with giving our spouse “just enough” attention or how we’re “phoning it in until retirement.” Why not? Because we belong to a culture that doesn’t value income-as-such. But when you’re poor, money does buy a measure of happiness, so why do we take such joy in making less simply because we don’t need it? Resources in excess of need can always be given to those who need them more, either through voluntary charity or state-run cash transfers (i.e. taxing and spending.) To my mind, the reality of satisficing is largely selfish.

I suspect these little exhortations to “chill” are not in fact designed to change anyone’s behavior. Rather they’re a kind of self-congratulation. “Look at me! I’m rich and I don’t work very hard!” Last time I checked, the word for self-congratulatory idle rich folks? “Parasites.” In that sense, “medium chill” is just another way of saying “I got mine.”

Congrats! You won the genetic, educational, and financial market lotteries! You bought low and sold high! To say that the middle class is “losing the race for second place” is to point out that, despite their efforts to “chill” they just can’t help getting ahead. The problem is privilege, and structural inequality, and a changing global economy.

That’s why I tend to think that we ought not to worry so much about losing the race for second place through the enrichment of the middle class. We should focus on the poor, many of whom don’t even figure in national inequality numbers because they don’t live in this country: they belong to the “Bottom Billion” who live outside the US on less than $1 a day PPP.

Now, the strongest argument in favor of a domestic middle class (and a massively reduced upper class) is Elizabeth Anderson’s argument for “relational equality,” sometimes also called “democratic equality.” If we prioritize political participation over a more general account of capabilities, then we might worry less about the material well-being of the poorest and more about their capacity to participate as equals in the self-governance of our democracy. But I’ll save that for another day.

Does Basic Income + VAT “Solve” Immigration?

File:US Customs and Border Protection officers.jpg
US Customs and Border Protection officers enforce our labor market protections with paramilitary techniques.

One of my favorite liberal policies is the basic income proposal. The idea is that all citizens have a basic guaranteed income, below which no one may fall. As the argument goes, this supplies more flexibility than basic provision of essential services, and renders recipients much more autonomous than they currently are, since the government tends to spend redistributed money on the things it values the most, rather than the things that the poor value the most. There’s also a fairly easy way to run such a program: instead of making the basic income available only to the poor, you can make it a citizenship grant available to everyone who files tax returns, like social security. This radically simplifies the administration and eliminates the wasteful need to inquire into the deservingness of the recipients. If you’re a citizen, you get a check. Alaska has a system like this for all residents.

As I wrote recently, the dark side of the basic income proposal is that it privileges citizens over non-citizens. Perhaps this dark side is mitigated a bit if every nation-state in the world enacts a basic income, but there’d still be horrible inequalities between nations. However, in this post I want to argue that this kind of inequality is better than the status quo: “second-best” ideal theorizing… with a dash of public choice caution for good measure. Continue reading Does Basic Income + VAT “Solve” Immigration?

How Taxation Effects Income Share (Not Much)

Last week, Greg Mankiw posted this graph without comment:

I thought there was something weird about the graph, and it’s been nagging at me. For one thing, it compares the bottom four quintiles to the top 5 percent of Americans. For another, it ignores non-federal taxation. (State and local taxes are more difficult to calculate, I suppose.) So I dug around and found the data* to produce this graph, which compares the share of income earned pre-tax to the share of income kept post-tax. It still only counts federal taxes, but it seems a more honest graph:

Two things are noticeable right away: the top quintile earns more than half of all income in the United States, and only the top quintile loses ground relative to its pre-tax share because of federal taxation. Many goods consumed by the richest 20% of Americans are signalling goods, and thus only valued comparatively (nicer house, better clothes, fancier car, more exclusive schooling for one’s children, etc.) But of course not everything is pure signalling, so relative inequality may be less important that absolute inequality, just as relative wealth may be less important than absolute wealth. Not everything is about keeping up with the Joneses. So if we can bypass these questions of fairness and move on to the relevant question, which is how large a GDP it is we’re sharing, I think that would be good. Tax policy will certainly have implications for future growth, but let’s not feel too bad for the top quintile.

*My numbers are from 2006, supplied by the CBO. Mankiw’s chart is based on estimates of 2010 made by the Tax Policy Center in August of 2009.