An Idea for Addressing Income Inequality

Lately I've been more than a bit frustrated with the complete tone-deafness of America's political leaders when it comes to the issue of growing income inequality. Democrats, it seems, are so beholden to their big donors and/or so afraid of being called communists by right-wing talk radio that they only mention income inequality in hushed tones and don't dare to do anything substantive about it. Republicans, on the other hand, either want to use rising poverty rates as a club to beat up on the President, or they want to cut programs to assist the poor as a means to punish them into not being poor anymore. As John Oliver pointed out on this week's The Bugle, this attempt to address the problem of poverty is a bit like a doctor trying to awaken someone from a coma by repeatedly hitting the patient in the head with a wooden plank; it's unlikely to work, and if it does, the guy is going to be pretty pissed off when he wakes up.

I could rage about this for a few hours, but it's more constructive to try to think about solutions. Since the problem, as I see it, doesn't come from an inability to address the issue of poverty (we've done it before, quite successfully, with some of the very programs people are trying to cut now). It's caused by a lack of political will. So, tackling poverty should start with addressing Congress. Electric cattle prods might be a popular solution, but I'm pretty sure that's illegal, and if it's not, they have the power to make it so. Instead, here's an idea:

What if Congressional salaries were legally pegged to the median of U.S. incomes?

First of all, it shouldn't be the mean income ($55k), because Congress could skew that number upwards and enrich themselves by creating more policies that enrich a few people at the top. Instead, it should be the median. That's not an easy number to find, it turns out, but if I'm reading this correctly (click here, then, under the Table H-1. Income Limits for Each Fifth and Top 5 Percent, click on the "All Races" and note the top of the second quintile) it's probably right around $40k. Or, according to data from the Social Security Administration, the median per capita worker income is $26k. Like I said, it's not easy to find, but I'll bet it would get a lot more attention if the salaries of everyone in Congress were pegged to it. Oh, and the median would have to be calculated based on the income people actually pay tax on. In other words, if Congress continued to allow people to pay a different rate of tax on investment income, that income would not be included in the calculation of their own incomes. You can bet they would quite suddenly have a come-to-Jesus moment about investment income being taxable as income.

Anyway, that would have to be all these politicians were allowed to live on. Anything they owned previously would be put in a trust until after they were out of office. They would have to live in some pretty crummy neighborhoods in D.C., and that could open their eyes a bit. The President's salary should be exactly the same, but with the added perk of a really nice house. To make sure that all these politicians couldn't just live in near-poverty for a couple years and then cash in as consultants for the companies that were promising them lucrative future salaries in exchange for bad bills, the politicians would have to live with the mode for an additional ten years after leaving office, but with any difference between the current year's mode and the mode of the year they left office doubled. In other words, if the median went up by 1% the next year, they'd get a 2% raise. If it went up by 5%, they'd get a 10% raise. Conversely, if they padded the stats by creating economic bubbles while in office, and then those bubbles burst and the median went down by 2%, their income would go down by 4%. Consequently, they would be motivated to enact policies that would lead to longer term growth.

I think this idea would be a huge improvement. At the very least, it might prevent a few jerks in Congress from telling people without shoes to pull themselves up by their bootstraps. At best, it could lead to a very different way of regulating the economy. And it can't be accused of being communist, since flattening incomes towards the middle wouldn't change the median at all. This would make politicians try to raise the bottom and the top, but it would make them focus on the quantity of people at the bottom, not just the average per capita income.

What do folks think of this idea? Silver bullet or total dud? And if you think it's a dud just because the people in Congress would never vote for it, ask yourself why you would vote for anyone who wouldn't.

[Note: When I posted this originally, I kept writing "mode" instead of "median" and "median" instead of "mean." Luckily, I have friends who are smarter than I am who quickly pointed out the error. Fixed!]

Update: September 24th

My friend Scott, who blogs here and generally engages me in great debates because we come at problems from very different ideological angles, has a wonderful pair of ideas I want to share:

"[T]ax inheritance by the beneficiary rather than by the deceased; several small inheritances from one large estate should be taxed lower than the whole going to one or a few single individuals. The concern should be less about how much the deceased had acquired and more about how much any single recipient is getting; after some baseline (which should likely be pegged to a median home price, or should account a primary residence of the deceased as separate from normal liquid assets), the rest ought to be treated as regular income."

This is a great idea because it would encourage billionaires to give their inheritances to a broader number of people or put more of it in the public coffers. That's a winner.

Scott's second idea is more complicated, but I like it, too:

"[T]ax brackets should be pegged to median incomes. The executives with the highest salaries and thus highest tax brackets would be far better incentivized to raise wages and salaries beneath them and they have far more control over this. And it would need to be clear that this is the median of all filers, rather than just the employed.

"...an illustration.

"Let’s take the Ike tax brackets that are so widely discussed. He had a really high rate (something like 90%), but that marginal rate was only on incomes over $400,000 at a time when the median income was about $6,000. This is very different to today, where the highest bracket can hit a middle class person in a boom year that may not be representative of their overall wealth, opportunity costs, risks, future earnings, etc. So the idea would be something like this. Let’s take that ratio that Ike had and say that the top rates kick in at 50X and 100X the median salary. That is to say the top rate goes back down to 35% for whatever that bracket is today ($400,000, the same nominal value as in Ike’s time but drastically less in buying power). The next bracket jumps up to 70% on incomes over 50X the median, while incomes over 100X the median are taxed at 90%.

"Now let’s look at this in practice. The median household income in 2010 was $51,017, and it dropped to $50,054 in 2011. These numbers could not practicably be applied for anything but a two-year lag, so the rates generated would apply in 2012 and 2013, respectively (enough time to have the data compiled and have the rates known publicly by Jan 1st). In 2012, the rates would kick in at $2.551 million and $5.102 million, while in 2013 they’d drop to $2.507 million and $5.005 million, meaning that for any person making more than $5.2 million, $48,150 more would be exposed to 70% rather than 35% taxation, and $96,300 more would be exposed to 90% taxation rather than 70% taxation. Thus a person ends up paying a little more than an additional $36,000 in taxes because the median income dropped.

"That might seem somewhat small by comparison to the salaries, but let’s look at it in a different light. If the median income jumps $10,000 from $50,054 to $60,054 (assuming we’re talking several years, here) then the tax burden for that person making more than $5.2 million drops $375,000. That’s a huge incentive to business leaders to raise their employee’s salaries, and gives them a direct stake in raising wages and reducing inequality.

"This is a quick-and-dirty illustration to make the point, but theoretically the entire set of marginal rates could likewise be set. That $400,000 bracket could be changed to 8X the median. If the median increases, you lower your tax burden for a given nominal income.

"Currently, brackets rise with inflation. This means that as inflation goes up, tax burdens go down in order to account for the fact that $100k means a very different thing in 1990 vs. 2010. That makes some sense. To a degree, my plan accomplishes the same sort of thing, because inflation generally rises with average incomes. But the difference is that it only remains fixed to inflation alone when inequality remains constant. If inequality rises, however, the tax code becomes more progressive, and if inequality falls, the tax code becomes flatter.

"Ideally, a mechanism ought to be incorporated to look not only at the median, but some metric that assesses the 20th and 80th percentiles as well. The reason for this is that Wal-Mart raising wages across the board is unlikely to bump the 50th percentile directly, and the connection between wages/salaries and progressivity would be slightly less direct than is desirable. But I think it would be a good start."

See what I meant about having smart friends?