Elisabeth Warren, David Leonhardt, Redistribution, and Predistribution

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Robert Waldmann
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I just had an unusual experience. I was convinced by an op-ed. One third of the way through “Elizabeth Warren Actually Wants to Fix Capitalism” by David Leonhardt, I was planning to contest one of Leonhard’s assertions. Now I am convinced.

The column praises Elisabeth Warren. Leonhardt (like his colleague Paul Krugman) is careful to refrain from declaring his intention to vote for her in the primary. I am planning to vote for her. I mostly agreed with the column to begin with, but was not convinced by Leonard’s praise of Warren’s emphasis on aiming for more equal pre-fiscal distribution of income rather than just relying on taxes and transfers to redistribute.

In particular I was not convinced by

This history suggests that the Democratic Party’s economic agenda needs to become more ambitious. Modest changes in the top marginal tax rate or in middle-class tax credits aren’t enough. The country needs an economic policy that measures up to the scale of our challenges.

Here two issues are combined. One is modest vs major changes. The other is that predistribution is needed in addition to redistribution, as discussed even more clearly here

“Clinton and Obama focused on boosting growth and redistribution,” Gabriel Zucman, a University of California, Berkeley, economist who has advised Warren, says. “Warren is focusing on how pretax income can be made more equal.”

The option of a large change in the top marginal tax rate and a large middle claaa tax credit isn’t considered in the op-ed. I think this would be excellent policy which has overwhelming popular support as measured by polls (including the support of a large fraction of self declared Republicans). I note from time to time that, since 1976 both the Democrats who have been elected president campaigned on higher taxes on high incomes and lower taxes on the middle class (and IIRC none of the candidates who lost did).

This is also one of my rare disagreements with Paul Krugman, and, finally one of my rare disagreements with Dean Baker (link to a book which I haven’t read).

After the jump, I will make my usual case. But first, I note Leonardt’s excellent argument for why “soak the rich and spread it out thin” isn’t a sufficient complete market oriented egalitarian program. It is phrased as a question

“How can the next president make changes that will endure, rather than be undone by a future president, as both Obama’s and Clinton’s top-end tax increases were?”

Ahh yes. High taxes on high income and high wealth would solve a lot of problems. But they will be reversed. New programs such as Obamacare or Warren’s proposed universal pre-K and subsidized day care will not. Nor will regulatory reforms such as mandatory paid sick leave and mandatory paid family leave. I am convinced that relatively complicated proposals are more politically feasible, not because it is easier to implement them, but because it is very hard to eliminate programs used by large numbers of middle class voters.

I’d note that I had already conceded the advantage of a regulatory approach which relies on the illusion that the costs must be born by the regulated firms. Here I note that fleet fuel economy standards are much more popular than increased gasoline taxes. One is a market oriented approach. The other is one that hides behind the market as consumers don’t know that part of the price of a gas guzzler pays the shadow price of reducing fleet average milage.

OK my usual argument after the jump

It is unusual for me to disagree with Baker, Leonhardt, and (especially) Krugman. I am quite sure that the Democratic candidate for president should campaign on higher taxes on the rich and lower taxes for the non-rich.

To be sure, I can see that that isn’t the only possible policy improvement. Above, I note the advantages of hiding spending by mandating spending by firms and of creating entitlements which are very hard for the GOP to eliminate. I’d add that we have to do a lot to deal with global warming. Competition policy is needed for market efficiency. I think unions and restrictions on firing without cause have an effect on power relations which is good in addition to the effect on income distribution.

But I don’t understand the (mildly) skeptical tone. I will set up and knock down some straw men

1) Total straw — US voters are ideological conservatives and operational liberals. They reject soaking the rich, class war, and redistribution. To convince them to help the non rich, one has to disguise what one is doing.

This is especially silly, and no one in the discussion argues this (anymore — people used to argue this). The polls and elections are clear. US voters want higher taxes on high incomes and on the wealthy. Also Congress has gone along — the effective tax rate on the top 1% was about the same after Obama as before Reagan

2) Extremely high marginal tax rates are bad for the economy. Here this is often conceded, in particular by people arguing for modest increases in the top marginal tax rate. The claim is not supported by actual evidence. In particular the top rate was 70% during the 60s boom.

3) high tax rates cause tax avoidance. This reduces efficiency and also means that they don’t generate the naively expected revenue. There is very little evidence that this is a huge issue. In particular there was a huge increase in tax sheltering after the 1981 Kemp-Roth tax cuts and reforms. It is possible to design a tax code which makes avoidance difficult (as shown by the 1986 Kemp-Bradley tax reform). It is very hard to implement such a code without campaigning on soaking the rich and promoting class uh struggle.

4) more generally, redistribution does not work — the post tax income distribution is not equalized because the rich find a way. This is super straw again. All the international and time series evidence points the other way.

I don’t see a political or policy argument against a large increase in taxes on high incomes (70% bracket starting at $400,000 a year) used to finance a large expansion of the EITC (so most households receive it).

I think a problem is that a simple solution does not please nerds. I think another is that a large fraction of the elite would pay the high taxes and it is easier to trick them into trying to make corporations pay the costs.

But I really don’t understand.