Yet that inequality is less — probably much less — than it would be in the absence of schools.

TO BE NOTED: From Consider The Evidence:

"Do schools make inequality worse? May 21, 2009

“Far from leaning against economic inequality, U.S. schools make it worse.” This sentiment, from a recent Clive Crook op-ed, expresses a view that’s commonplace on both the left and the right, and among both proponents and opponents of school reform.

It’s wrong. Americans do leave the schooling system more unequal in cognitive and noncognitive skills than when they enter it. Yet that inequality is less — probably much less — than it would be in the absence of schools. Schools don’t increase inequality; they just don’t do enough to overcome the inequality produced throughout childhood by differences in families, neighborhoods, peers, and other influences.

How do we know that? First, children are vastly unequal in ability when they enter the school system at age five or six. This is due partly to genetics and partly to environmental differences.

Second, we have evidence from the natural experiment that is summer vacation. During those three months out of school, the cognitive skills of children in lower socioeconomic status (SES) households tend to stall or actually regress. Kids in high-SES households fare much better during the summer, as they’re more likely to spend it engaged in stimulating activities. In his book Intelligence and How to Get It, cognitive psychologist Richard Nisbett concludes that “much, if not most, of the gap in academic achievement between lower- and higher-SES children, in fact, is due to the greater summer slump for lower-SES children” (p. 40).

Without schools this pattern would be magnified, and the gap in cognitive and noncognitive abilities at age 18 almost certainly would be much greater than it now is.

This by no means implies that our educational system is doing fine. It could and should do much better at helping children from disadvantaged environments. But saying it currently makes things worse suggests the situation is hopeless. Instead of promoting reform, that undercuts it."

One way to do this would be via a federal consumption tax, such as a value-added tax (VAT)

TO BE NOTED: From Consider the Evidence:

"Reducing Inequality: How to Pay for It April 17, 2009

The Labour Party returned to power in the U.K. in 1997 based in part on a pledge by Tony Blair and Gordon Brown not to raise taxes’ share of the British economy. In his 2008 presidential campaign, Barack Obama promised to reduce taxes for the bottom 95% of Americans. In both instances this commitment succeeded in insulating the progressive candidate from what had become the right’s most powerful electoral club: stoking fear of tax increases by the left.

But while it may be smart electoral politics, committing not to increase taxes’ share of GDP, as Blair did, or to lower taxes for most of the population, as Obama has done, makes it difficult for a government to make much headway in addressing income inequality. Obama has some leeway; the economic crisis has necessitated increases in government spending that can justifiably excuse some backtracking on his campaign pledge. Fully consistent with his promise, he should increase the tax rate on high-end incomes (beyond simply letting the Bush reductions expire). Two other progressive tax reforms are worth pursuing, though they would affect some in the bottom 95%. One is to reduce or end the homeownership subsidy. More than 80% of the $160 billion in foregone revenues from the deduction for mortgage interest and property tax payments goes to households in the top income quintile. The other is to introduce a modest tax on financial transactions.

But should the focus be confined to steps that make the tax system more progressive? Many on the left view heightened progressivity as the key to inequality reduction. Yet in the United States and other rich countries the tax system overall, including taxes of all types and at all levels of government, is essentially flat; households throughout the income distribution pay roughly similar shares of their market income in taxes. As the following chart shows, inequality reduction is achieved not through taxation but with government transfers (and services).

Taxes help to reduce inequality mainly via their quantity rather than their progressivity. The greater the tax revenues, the more government is able to boost incomes and living standards of those in the lower half of the distribution with transfers and services.

Moderate or high levels of tax revenue can’t come solely from higher rates or new taxes on the rich; the math simply doesn’t work. To significantly increase spending on transfers and/or services, President Obama and/or his successors will need to increase taxes on the middle class. One way to do this would be via a federal consumption tax, such as a value-added tax (VAT). We have state and local consumption (sales) taxes, but we raise less money from consumption taxes than any other rich country. Consumption taxes are regressive, and for that reason they’re often dismissed by the American left. But they can be tweaked to limit the degree of regressivity. And if the money is put to progressive use, the benefits may outweigh this drawback.

This entry was posted on April 17, 2009 at 9:25 pm and is filed under Inequality, Taxes. "

The EITC is a terrific policy

TO BE NOTED: From Consider the Evidence:

"Reducing Inequality: Boosting Incomes in the Bottom Half April 16, 2009

So far in this series of posts on reducing income inequality in America I’ve said that it would be good if there were less inequality, that greater unionization might help but probably isn’t in the cards (even if EFCA becomes law), that more and better education would be a good thing but isn’t likely to make much of a dent in the inequality problem, and that curtailing globalization is a bad choice for progressives even if it would help a lot. So what should we do?

Recall that there are two key components of the rise in inequality: slow income growth in the lower half (or two-thirds) of the distribution and soaring incomes at the top. Let’s start with the first of these two. I think a key component of an effective and politically feasible strategy is an enhanced statutory minimum wage and Earned Income Tax Credit (EITC).

This year the minimum wage will increase to $7.25 per hour. I’d like to see it raised again in 2010, to $8.00. A more important change is to index the minimum wage to inflation. As the following chart shows, since the late 1970s the minimum wage has been allowed to languish for lengthy periods with no increase, resulting in large declines in its inflation-adjusted value. With increases in 2007, 2008, and 2009, it will be at a reasonably high level compared to the past three decades, though still below its late-1960s peak. Raising it to $8.00/hour and keeping it at that value would be a significant step in the right direction.

Is $8.00 an hour high enough? It’s difficult to tell. Two considerations make me inclined to prioritize locking in something like that level rather than aiming for a larger increase right away. The first is jobs. Opponents of raising the minimum wage often contend that any increase will produce employment declines. Our experience with past increases suggests little support for this notion, but it’s equally wrong to presume there won’t be an adverse employment effect no matter how high the minimum wage. Surely there is some level that is too high. This argues for incremental upward adjustment from a stable floor. Second, proponents of a sizable increase in the minimum often point out how inadequate it is given the cost of living in certain parts of the country. That’s quite true, but it’s probably better addressed by state and local governments stepping in with their own higher statutory minimums, as a growing number have done over the past decade.

An expanded Earned Income Tax Credit would be similarly helpful for low- and middle-income Americans. The EITC is a terrific policy: it boosts the incomes of low-earning households, it encourages employment, it has low administrative costs, it creates minimal stigma for recipients, and it’s indexed to inflation. Currently the maximum value of the credit is about $5,000, available to households with two children and with earnings between $12,500 and $19,500. It then declines steadily until it reaches zero at around $43,000 in earnings. For households with one child the credit is lower, and for those with no children it is quite small. A chart showing the current level and structure of the credit is available from the Tax Policy Center.

I’d like to see the EITC look something more like this:

This EITC would extend well into what most of us think of as the middle class. It wouldn’t provide a lot of to those with earnings above $50,000, but it would help. Phasing out the credit more rapidly (making the slope of the line on the right side steeper) risks creating work disincentives. Moreover, there’s a potential political advantage to including those with higher incomes. When the middle class uses the same programs as the poor, it tends to be more supportive of those programs; the “us” versus “them” mentality that weakens support for social policy is likely to have less political bite. This EITC expansion would not be cheap. I’ll say a bit about how to pay for it in a future post.

With these changes in the minimum wage and the Earned Income Tax Credit, a single adult working full-time year-round at minimum wage would have an income — earnings plus EITC — of approximately $19,000, compared to 15,500 under current policy. A family of four with two minimum wage earners would have an income of about $38,500, compared to $32,500 currently. That’s not a full solution to the inequality challenge, but it’s a good start."