Wednesday, November 16, 2022

Tax Policy Colloquium for November 15: Goldburn Maynard's Biden's Gambit and Wage Enslavement papers

Yesterday at the colloquium, Goldburn Maynard presented two thematically linked papers: Biden's Gambit: Advancing Racial Equity While Relying on a Race-Neutral Tax Code, and Wage Enslavement: How the Tax System Holds Back Historically Disadvantaged Groups of Americans. (The latter was co-authored by David Gamage.) Here are some of my thoughts about the issues discussed therein:

1) Racial equity

Biden's Gambit (which discusses the American Rescue Plan Act) notes a distinction that has been drawn in the literature between "racial equity" (RE) and "racial equality." As it notes: "While racial equality has come to connote equal treatment and race blindness," RE is about fairness and anti-subordination, and is "firmly race-conscious."

I would describe this distinction as involving, not "equity" versus "equality" as such, but the choice between substantive and purely formal definitions of racial equality.

To illustrate the purely formal view of racial equality, consider Chief Justice Roberts' infamous statement (or at least it should be): "The way to stop discrimination on the basis of race is to stop discriminating on the basis of race."

This silly and disingenuous bromide suggests that there would be nothing to worry about if the elimination of affirmative action in college admissions led to elite institutions' being 100 percent white, even if this result was due to historical  and continuing private sector racism. It purports to perceive no difference between using race-conscious categories to dismantle and to enforce racial subordination.

While using racial categories raises important issues, I can't imagine a coherent normative view that was based on caring only about formal, not substantive, racial equality. Using race-conscious categories to advance substantive racial equality clearly raises a bunch of serious issues (e.g., pertaining to perceived fairness, political support, and potential misuse), but cannot reasonably be ruled out in principle.

2) "Wage enslavement"

The Wage Enslavement paper uses this term, a bit apologetically, because it was picked as a framing device by the organizers of the symposium in which it appears.

The term "wage slavery" has a bit of a mixed history, as it was used pre-Civil War by slavery proponents to argue that Northern workers were no better-off than enslaved persons in the South. But it has come to denote being trapped in a bad job (e.g., one that is not only low-paying but also unpleasant, exploitative, and physically dangerous) because one otherwise can't stay afloat.

Its metaphorical relevance to the paper arises from the concern that (a) people who don't accumulate significant savings must keep working to support themselves, and (b) the US tax system contributes to this lack of savings from one's work by imposing higher tax rates on labor income than on capital income. 

Among the standard tax policy issues raised by this view are (a) the incidence of taxes on capital income, e.g., do they affect wages over time, (b) the income tax's system's discouragement of saving even if capital income tax rates are nominally lower, and (c) whether one should view the accrual of Social Security retirement benefits as reducing the net marginal tax rate on the underlying wages.

I also would argue that a big part of the issue here is not so much the relative tax rates on "wages" and "capital income" as the fact that much of what is economically labor income may be mislabeled by the tax system as capital income. E.g., suppose I am a founder who creates a successful company, and that I "underpay" myself in salary terms because I am profiting from the stock appreciation (but I hold the shares until death). Then my labor income, in economic terms, faces only the 21% corporate rate, and not even that insofar as I can tax-plan effectively at the company level.

The paper mentions the well-known "Buy-Borrow-Die" (BBD) formulation by my good friend Ed McCaffery, but I have long thought that a better formulation would be "Earn-Borrow-Die." After all, the point isn't to buy stocks on margin - thus profiting only to the extent that they earn a rate of return exceeding the interest rate on the loan, and not even creating a tax arbitrage if the interest is caught by the investment interest limitation. This is not necessarily a well-advised plan. Rather, the idea is to do BBD with the proceeds of untaxed "sweat equity" - thus making it, in effect, EBD.

3) The racial wealth gap

As the paper notes, a Brookings analyst, Vanessa Williamson (who also kindly commented on my new book at an October 6 NYU event) estimates the "racial wealth gap" at $10.14 trillion. This is the estimated amount by which Black households' actual share of US national wealth ($2.54 trillion) falls short of what it would be ($12.68 trillion) if held proportionately to population.

There are several reasons, including at least the following, why the racial wealth gap matters:

--Even if it had no concerning empirical consequences as such, it would be of interest as a diagnostic. The gap "shouldn't" be so great (and it's much greater than the related racial income gap), unless other, underlying things are wrong.

--This is all the more true given that various conventional modes of explanation appear to fall short of accounting for it. For example, it persists at a high level even when one adjusts for income or education differences. It appears not to reflect different savings preferences. Some of it may reflect different types of asset holding (although that itself might call for further explanation), but there is also a large unexplained residual that those working in the field of stratification economics have sought to explain.

--Despite wealth's flaws as a measure, it offers more of a lifetime perspective than income, since it includes resources that are neither earned nor consumed in the current year, but that are relevant to one's level of material wellbeing. Put differently, savings matter a lot, as does the intergenerational transmission of material wealth.

--It contributes to substantive racial inequality and racial subordination, which reduce the wellbeing not only of its victims but actually of all Americans, who live our lives in its malign shadow. Consider the evidence (e.g., from Wilkinson & Pickett's The Spirit Level) that economic inequality reduces subjective wellbeing (and increases social gradient ills) for all groups. This is surely true as well for racial inequality. I suspect that even the millions of insecure Trumpian white supremacists who seek solace from subjugating non-whites would be better-off if our country's pervasive racial consciousness and anxiety could be shunted off centerstage by the achievement of secure racial equality.

--It's easy to think of the racial wealth gap in zero-sum terms. E.g., if national wealth were the same but there were no racial wealth gap, then Black households' having $10.14 trillion more in savings would arithmetically require other households' having $10.14 trillion less. But in a positive-sum world one group's having more than previously, because their opportunities have been increased, does not imply others having less.

4) Tax policy takeaways

As I discuss in this article, which recently appeared in this volume, the tax policy literature is still at an early stage of incorporating racial inequality concerns into an analysis that has traditionally been more focused on general economic inequality. But herewith a few quick points:

--Bad rules are even worse than we thought: Work by Dorothy Brown and others suggests that a number of income tax rules that already were widely viewed in the biz as defective, also tend to aggravate racial inequality (even when one adjusts their impact to income). Examples include the home mortgage interest deduction, income tax preferences for retirement saving that have been found to do little to increase retirement saving by those with the greatest need for it, and marriage bonuses for one-earner couples. The new information about these provisions' adverse racial impact is good to have, but it doesn't change bottom-line conclusions insofar as we already knew that these were bad rules.

--But what about what are otherwise good rules?: Things get more complicated if one views a rule as being good tax policy except for its having an adverse effect on substantive racial inequality. Then such questions arise as: How should one evaluate the tradeoffs? Should one now oppose this rule despite its otherwise beneficial net effects? Can one compensate / adjust for its adverse racial effects, thereby continuing to secure its other benefits?

An example might be switching to the income tax to a progressive consumption tax, if one otherwise favors this this switch (as I did at one time) but it were to turn out to increase the racial wealth gap relative to not making the change. A second example might be adopting a VAT without, rather than with, an exemption for "necessities," where the VAT would be used to fund good things. A third might be repealing (or declining to adopt) hypothetical income tax preferences that, while otherwise inefficient, were opposite to the home mortgage interest deduction in that they happened to benefit Black households relative to White ones at the same income level due to differences in asset choice, etc.

A natural way to think about this is in terms of the standard argument that one should think only about efficiency in designing the tax base, since once can separately adjust for progressivity. Thus, suppose again that one is choosing between an income tax and a progressive consumption tax, in light of one's believing that the latter is more efficient but (all else equal) less progressive. In principle, one can get the best of both worlds by adopting the progressive consumption tax but making it more progressive than the income tax to which it is being compared in its marginal rate structure, allowance for "basic income" cash grants, etcetera.

With respect to racial inequality, progressivity adjustments get you at least part of the way there, given the racial income gap. But one could view this as not doing enough, be it due to the larger racial wealth gap or the adverse racial effects that particular rules have even once one has adjusted for income. This in turn might call for (1) addressing wealth inequality more aggressively than one would otherwise consider optimal, given all the other tradeoffs, and also (2) considering the use of race-conscious rules (the tax equivalent of affirmative action) to make up the difference and/or move broadly in the equalizing direction.


leeqeen said...

This is an excellent paper and it is very timely. With the current economic crisis, it is more important than ever to have a good understanding of wage policy. This paper provides a great overview of the current situation and offers some very insightful recommendations. client reporting software

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