Josh Barro is a harsh critic of conservatives, yet unlike most harsh critics of conservatives, he has a solid, well-grounded, caricature-free understanding of what conservatives actually think. And as an avowed neoliberal, he is sympathetic to many of the goals of libertarians and conservatives. Following up on his recent critique of conservative reform efforts, which we discussed in this space, he makes a number of astute points in a recent post, many of which resonate with ideas we’ve advanced in this space, e.g.:
(1) Rising income inequality is a problem primarily because it contributes to making the cost of health care, education, and housing more burdensome for lower-income families, even as high-quality consumer goods become more readily available. Reducing occupational licensing, reforming zoning laws, facilitating business model innovation in the education and health sectors, and restructuring subsidies for the purchase of these critical goods and services can mitigate cost growth. But these steps will be difficult, as they will be vigorously opposed by vocal and effective constituencies that benefit from the status quo.
(2) A sharp increase in high-skilled immigration (HSI) will likely contribute to wage compression, as it will tend to suppress wage growth among skilled service providers. Yet as in the case of (1), an increase in HSI big enough to make an appreciable difference in the cost of medical care, etc., will engender resistance.
But Josh also raises issues that we tend to neglect, e.g.,
(3) He offers a critique of Ryan-style fiscal policy:
Lower taxes and a smaller government might raise GDP growth, but there’s no particular reason to assume that growth would accrue in a more equal manner than we have experienced recently. The main effect of Ryan-style fiscal policy, which makes taxes both lower and less progressive and while shrinking benefits, would be a rise in after-tax inequality.
Ryan’s rejoinder would presumably be two-fold: (a) that a rise in after-tax inequality isn’t intrinsically problematic if it is accompanied by robust growth in disposable income for lower-income households and (b) that Ryan and at least some of his congressional allies are interested in the kind of reforms Josh (and many on the center-right) champion, including reform of tuition tax subsidies and the tax exclusion for employer-sponsored insurance. While I am sympathetic to (a), Josh has good reason to question whether or not growth in disposable income for lower-income households will be robust enough under the scenario Ryan and I find most attractive to address the underlying political challenge. And it is fair to say that while Ryan has made an effort in the direction of (b), particularly with regards to reforming the tax treatment of medical insurance, what you might call the microeconomic or cost-of-living reform agenda remains a badly underdeveloped theme among Republicans.
(4) So Josh concludes that Republicans ought to pivot towards making sure that while redistribution can and should increase, it should be as growth-friendly as possible:
If conservatives made peace with the need for more redistributive economic policy, they could fight to make sure it is pro-growth. For example, they could focus on minimizing poverty traps created by means-tested entitlements, and making sure the tax base is broad so progressivity can be achieved with relatively low tax rates.
There is, however, another way to approach this landscape. Consider the following observation from the Ryan-led House Budget Committee:
One underreported conclusion from the CBO study is that shifts in government transfers and federal taxes have contributed to increasing inequality over time. Both taxes and government transfers remain progressive, but the equalizing effect of transfers and taxes on household income was smaller in 2007 than it was in 1979 (see Figure 3).
This is mainly because the distribution of government transfers has moved away from households in the lower part of the income scale. For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers.
This shift reflects a growth in programs that focus on the elderly population and are not for the most part income-adjusted, such as Social Security and Medicare. In other words, the structure of some of the nation’s largest entitlement programs has decreased the share of government transfer payments going to lower-income households and directed an increasing share of government spending to wealthier seniors. According to the CBO’s findings, this trend, accelerated by the retirement of the baby-boom generation, contributes to an increase in inequality.
The tax system has also become slightly less of an equalizing factor today than it was in 1979. The composition of federal taxes changed between 1979 and 2007, as less-progressive payroll taxes grew faster than more-progressive income taxes. The average payroll tax rate was slightly higher at the end of the period, while the average individual income tax rate was slightly lower. [Emphasis added]
Ryan and his allies don’t aim to sharply increase redistribution, yet they recognize that reforming taxes and social transfers might yield a system that, among other things, improves work incentives and does more to reduce after-tax inequality. One challenge is that the usual conservative strategy for reforming the welfare state is to rely more heavily on means-testing, but of course this tends to undermine work incentives, as we’ve discussed.
Andrew Biggs has explored strategies for reconciling these goals, and one hopes that congressional conservatives will embrace it. The following is drawn from Biggs’ essay on means-testing in the Fall 2011 issue of National Affairs:
There is an alternative approach — one that achieves many of the ends of traditional means-testing, but without inviting many of its drawbacks. The plan’s essential and distinguishing feature would involve limiting benefits based not on individuals’ incomes in retirement, but rather on their lifetime earnings. As noted above, Social Security already effectively does this, by paying proportionally lower benefits to people with higher average lifetime earnings. Today’s reformers could do the same, if to a greater degree.
For instance, the Social Security Administration already tabulates individuals’ average lifetime earnings as an intermediate step in calculating their retirement benefits. Reductions in Social Security or Medicare benefits, or increases in premiums, could be based upon this measure of average lifetime earnings rather than on income in retirement.
Unlike a strict means test, this approach would avoid creating powerful disincentives to save. Indeed, individuals facing lower Social Security benefits in retirement would have an incentive to save more during their working years to make up for the loss. And these increased savings would benefit not only the savers, but the economy as a whole: To the degree that retirement savings generally take the form of investment portfolios, increased saving for retirement would generate more investment capital — in turn boosting economic output and wages over the long term.
Relatedly, I’ve long been a fan of Eugene Steuerle’s critique of the structure of the new Affordable Care Act subsidies for medical insurance purchased on state-based exchanges:
[T]o create an administrable system, we need some certainty about the size of the subsidy; to be fair, we need to make the subsidy about the same for all those with equal incomes. This suggests that we must give households throughout the middle-income range (and perhaps those in some Medicaid and higher-income ranges too) about the same level of premium support, while eliminating discrimination against workers with employer-provided insurance. Rather than clawing back the subsidy indirectly with a new, hard-to-administer tax, we must use the current tax system to provide fewer subsidies, on net, to those with higher incomes.
If ACA can’t be repealed and replaced — which, in my view, should continue to be the goal, though it requires a GOP consensus on a politically attractive and workable replacement agenda — conservatives should focus on Avik Roy’s Swiss agenda and, per Steuerle, addressing the horizontal equity problems it creates.
It is also worth noting that Republicans might be more inclined to support policies that benefit middle-income households with children, one of our most persistent themes. Robert Stein’s expanded child tax credit effectively redistributes the tax burden from households with children (with some payroll tax liability) to high-earning households without children. This is unmistakably a form of redistribution, yet it is redistribution to households that earn at least some market income up to the level of tax liability. As such, it is difficult to characterize as a measure that undermines the work ethic. It might, however, tend to reduce labor force participation on the part of secondary earners in households with children, an outcome that social conservatives and many parents of young children will likely see as positive.
A Republican agenda designed to address the cost-of-living concerns of middle-income households, to palpably benefits working parents, and to responsibly modernize entitlement programs strikes me as something that would be very much in tune with the existing center-right electoral coalition, and indeed that could broaden this coalition.
The main obstacle, and it is a really important one, is that many of the GOP’s elite constituents might find such an agenda ideologically uncongenial. While relatively few Republican voters live in high-tax jurisdictions that benefit from the state and local tax deduction, for example, many Republican donors do live in these regions, and that is a barrier to tax reform. Greg Mankiw addressed a related issue in his recent fictional dialogue between Moderate Obama and Liberal Obama:
LIB: First, if you limit deductions, people in high-tax states will be hit particularly hard, because state and local taxes are deductible.
MOD: Isn’t that fair? I don’t see why states and towns that choose to have very high taxes should be subsidized by everyone else.
LIB: These states generally have liberal agendas, which I want to encourage, not penalize. And many of them, like New York and California, vote Democratic. After they helped us win such a great victory, I don’t think we should be asking our allies to bear a disproportionate share of the burden.
Replace Liberal Obama with a Republican donor living in a high-tax jurisdiction and you start to understand the scale of the problem. I don’t see this as an intractable problem, as I think a growing number of donors recognize the importance of a GOP that has a more robust and attractive middle-class economic agenda. But it should not be lightly dismissed.