Jacob Hacker is the director of the Institution for Social and Policy Studies and the Stanley B. Resor Professor of Political Science at Yale University. His most recent book, written with Paul Pierson, is “American Amnesia: How the War on Government Led Us to Forget What Made America Prosper.”
The tax cuts passed by Republicans late last year have received no shortage of criticism. But the case against the cuts goes much deeper than even the fiercest opponents of the legislation seem willing to take it.
The problem isn’t just that the cuts will make inequality worse — if that were the case, then adding more tax cuts for the middle class and poor would fix things. Nor is the issue that driving up the debt will threaten popular social programs like Social Security and Medicare — though it certainly will.
The fundamental problem concerns not redistribution but predistribution: all the ways in which government rules and activities change how American capitalism distributes its rewards in the first place. Predistribution policies — like public investments in infrastructure, education, research and development, and the regulation of labor and financial markets — built the American middle class. And the collapse of such investment and regulations is the main reason that the middle class has experienced stagnant wages, plummeting bargaining power and a declining share of national income since the late 1970s. If we are going to tackle American inequality, we need to take seriously the imperative of changing how markets work.
Former World Bank economist Branko Milanovic makes the point trenchantly: “The only promising avenue to reduce inequality is interventions that are undertaken before taxes and transfers kick in. These include a reduction in the inequality of endowments, especially inequality in education and the ownership of assets. … If market income inequality can be controlled, and over time curbed, government redistribution via transfers and taxes can also become much less important.”
Thus, the biggest defect of tax cuts — any tax cuts — is that they represent a huge lost opportunity to invest in our future. If the past generation has taught us anything, it’s that tax cuts for investors and a soaring stock market do little or nothing to help most Americans. By contrast, we know that public investments in productive physical and human assets do help, and they disproportionately help the less well off. Rich people have plenty of private capital to invest. Those who aren’t rich have their human capital (which rests on public investments) and the public capital that we all share as citizens: transportation and communication networks, shared scientific knowledge fostered by public R&D spending, civic institutions and so on.
If we really want to boost growth, we need to return to the successful investment model that really made America great in the 20th century. And that requires more revenues, not less; a more effective IRS, not a weaker one; and, yes, new taxes, such as a levy on carbon emissions that threaten our planet and a surcharge on short-term financial speculation that threatens our economy.
In addition to helping the less well off, better investment policies are essential to addressing the existential threat of climate change. Every major technological transformation in our history has required huge public investments. A successful shift to a green energy economy will be no exception, especially if that shift is to be accompanied by new and better jobs. Addressing climate change isn’t a distraction from reducing inequality; it could be a vehicle for doing so.
A good chunk of this investment needs to be directed at the communities that have been most disadvantaged by the shift away from old-fashioned manufacturing and dirty fossil fuels. Not incidentally, working-class voters in these areas cast their ballots overwhelming for Republicans in 2016. But they could be brought to support Democrats in higher numbers if they felt the government was responding to them, rather than cutting taxes for corporations and the wealthy.
Contrary to what most Americans seem to believe — including the one in the Oval Office — we are not a high-tax nation. Quite the opposite. We have the lowest revenues as a share of GDP of any advanced democratic nation. There’s ample room to increase revenues in sensible ways that help those on the losing end of rising inequality. There’s also enormous room to reduce the growth of our comparatively exorbitant health costs, the greatest threat to our long-term fiscal health.
Critics of the trickle-down model of tax cuts for those at the top have to go beyond arguments grounded in the logic of redistribution. They need to articulate an alternative growth model, one that rests on investments and rules that make markets work better for the middle class.
After all, Republicans understand predistribution. When they come into office, they seek policies that cripple unions, deregulate energy and financial markets, and weaken vital labor protections. These policies are partly about rewarding supporters, but they also reflect a vision — however faulty — of predistribution. Indeed, even GOP tax cuts and attacks on the IRS are mostly about predistribution. A major effect of lower top tax rates is to increase the incentive and ability of top earners to extract more income from their enterprises without adding value.
The political right understands that American inequality is ultimately about predistribution rather than redistribution. Why doesn’t the left?