Addressing income inequality – progressive taxation and upward mobility

As we’ve written before, poverty and inequality are two quite different public policy problems, and some thoughtful analysts question whether the latter is really a problem. Seattle Times business columnist Jon Talton, writing today on inequality, reviews some recent data and concludes:

So, while acknowledging that income inequality is a major problem for the nation and a concern here, the data indicate that Seattle is not among the worst metros.

The Opportunity Washington Priorities for Shared Prosperity places a strong emphasis on increasing upward mobility – increasing income and career potentials – through expanded educational opportunity, coupled with reform and accountability. Our research report underscores the high stakes.

For individuals, a strong education system is critical to becoming prepared to take advantage of the most exciting and rewarding career opportunities employers have to offer.

This is especially true in Washington, which by any measure has one of the most innovation- and technology-driven economies in the world. Washington already has a highly educated workforce. That strength will become even more important for the state in the years ahead. By 2020, estimates are that 70 percent of jobs in Washington will require some form of postsecondary education (compared to 65 percent nationally).

The evidence that improved education – our Achieve priority – pays off is overwhelming and thoroughly documented here, here, and here.

When the policy problem is diagnosed as inequality rather than as poverty or lack of opportunity, the policy prescriptions get muddled, sometimes tending toward redistribution. Steeply progressive taxation has been one recommendation receiving a lot of attention, both here and nationally.

A recent report from the Brookings Institution challenges the efficacy of attempting to reduce inequality by raising taxes on the wealthy.

The high level of income inequality in the United States is at the forefront of policy attention. This paper focuses on one potential policy response: an increase in the top personal income tax rate. We conduct a simulation analysis using the Tax Policy Center (TPC) microsimulation model to determine how much of a reduction in income inequality would be achieved from increasing the top individual tax rate to as much as 50 percent. We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest.

That such a sizable increase in top income tax rates leads to such a limited reduction in income inequality speaks to the limitations of this particular approach to addressing the broader challenge.

As The American Interest has written, voters so far have failed to identify inequality as an urgent policy problem. Still, inequality and tax policy will doubtless remain linked, increasingly so during the current campaign cycle. See, for example, the Tax Foundation’s analysis of the recent Trump tax plan.

Increasing opportunity – providing all Washingtonians the education and training necessary to succeed in today’s economy – is an urgent policy priority. Opportunity Washington has identified concrete policy solutions to meet the challenge. Together, we’re making progress.