Floor Speech of Sen. Chuck Grassley
Income Inequality Solutions Should Focus on Increased Opportunities
Delivered Monday, May 16, 2016
Income inequality has been a hot topic this campaign season. It has become the rallying cry of the left to support their economic agenda, whether it’s taxing the rich, raising the minimum wage, combating global warming, or any other number of policies.
If you listen to Secretary Clinton and Senator Sanders on the campaign trail you would get the impression that income inequality is the fault of Republicans. They contend that their preferred policies will close the gap between the rich and the poor.
However, the inconvenient fact is that inequality rose considerably more under President Clinton then it did under President Regan. Further, it has increased more under President Obama then it did under President Bush.
For any of my colleagues wondering how this could be the case, I would encourage them to read Lawrence Lindsey’s op-ed that ran in the Wall Street Journal about a month ago. I ask unanimous consent that this op-ed be entered into the record.
Mr. Lindsey’s article titled, How Progressives Drive Income Inequality, details how liberal policies have not only failed to reduce income inequality, but may in fact be contributing to it.
For instance, my colleagues on the left all too frequently look to ever richer and more expansive transfer payment programs as the solution. However, too often our existing transfer programs meant to help the less fortunate act as an anchor preventing Americans from climbing up the income ladder.
This risks creating a permanent under-class of citizens that are dependent on the state for their basic needs. That may be the dream of European-style Social Democrats, but it is most certainly NOT the American Dream.
The Congressional Budget Office looks at this effect in terms of marginal effective tax rates on low and moderate income workers. This refers to how much extra tax or reduction in government benefits is imposed on an American worker when he or she earns an additional dollar of income.
CBO estimates that in 2016 those under 450% of the federal poverty level will face an average effective tax rate of about 41%. Keep in mind that this is just the average. CBO demonstrates how a substantial number of workers could experience marginal effective rates exceeding 50, 60, or even 80%, which is far higher than the top statutory rate of 39.6% paid by the wealthiest Americans.
The end result is a worker facing these rates may just decide it doesn’t make much sense to take on extra hours or put in the effort to learn extra skill to increase their earnings potential. Historically, this has impacted married women in the workforce most of all as they are more likely than men to drop out of the workforce completely as a result.
Discouraging individuals from entering the labor force, taking on more work hours, gaining extra experience, or learning new skills, is a recipe for stagnant incomes and increased income disparity.
But, far from seeking to address these work disincentive effects, President Obama has made it worse for millions of workers. Take the premium tax credit enacted as part of the Affordable Care Act for instance. CBO estimates it will raise marginal tax rates by an estimated 12 percentage points for recipients.
Secretary Clinton and Senator Sanders also have provided no indication they would reverse this trend. In fact, they appear to only be interested in exacerbating this problem through richer transfer programs, increased costs on employers, and increased payroll taxes.
The scapegoat of the income inequality debate on the left has of course been the much hyped top 1%. Here we are told that if we just tax the rich, we can solve all are problems and address income inequality in one fell swoop.
But, if increased taxes on the wealthy is a solution to income inequality why -- as I pointed out at the start of this speech -- did income inequality grow faster under President Clinton then under President Reagan? And why has income inequality grown faster under President Obama than under President Bush?
The fact of the matter is that taxing the wealthy to reduce income inequality at best is a fool’s errand and at worst could be a blow to our economy – potentially harming individuals at all income levels.
A recent research paper by the liberal Brookings Institution looked directly into the question of whether substantially increasing taxes on the wealthy would reduce income inequality. To quote their findings, “An increase in the top tax rate leads to an almost imperceptible reduction in overall income inequality, even if the additional revenue is explicitly redistributed."
Raising taxes might be successful at generating revenue to fund greater wealth transfer payments. But it does nothing to rectify the opportunity gap.
Soak the rich policies do not create greater opportunity for low income individuals. In fact, wealth transfer policies often have the perverse effect of trapping their intended beneficiaries in soul-crushing government dependency. Moreover, because of their negative effects on economic growth and capital formation, they can reduce opportunity for all Americans.
You do not have to take my word for the anti-growth effects of increasing taxes. Research by Christina Romer, President Obama’s former chief economist, found that a tax increase of 1% of GDP reduces economic growth by as much as 3%. According to this study, tax increases have such a substantial effect on economic growth because of the “powerful negative effect of tax increases on investment.”
In effect, what those who pursue wealth destroying redistributionist policies are really saying – to quote Margaret Thatcher -- is that they “would rather that the poor were poorer, provided that the rich were less rich.”
That may result in less differences in wealth between Americans, but at the expense of making us all worse off. Our goal must be to create wealth and opportunity for ALL Americans.
I reject the notion that in order to improve the lot of one individual someone else must be made worse off. The leadership of other side has become fixated on redistributing the existing economic pie. I believe the better policy is to increase the size of the pie. When this occurs, no one is made better off at the expense of anyone else.
This is best achieved through pro-growth policies aimed at growing the economic pie, not by taking from some and giving to others.
Instead of seeking to reduce inequality by knocking the top down a few pegs on the income ladder, policies should be focused on helping individuals climb upward by tearing down barriers that stand in their way.
We all agree with the need for a sound safety net to protect the most vulnerable among us. But when that safety net begins to act like an anchor holding people back we need to be brave enough to chart a new course.
This is what we sought to do with welfare reforms in 1994 through work requirements and incentives. It is once again time for us to review and reform programs so as to minimize as much as possible the current built-in work disincentives from transfer programs that I discussed earlier.
Another often overlooked issue is the burden overregulation imposes on low-income individuals.
Dr. McLaughlin of the Mercatus Center in testimony before a Senator Judiciary subcommittee hearing earlier this year discussed two negative impacts regulation can have on low-income households.
First, while it is well recognized that regulations can increase transaction costs for businesses, it’s equally true that consumers feel the costs in the form of higher prices.
Since low-income households spend, rather than save, a much larger share of their income they are the ones hit hardest by the regulatory costs. In this regard, regulation acts much like a regressive tax on the consumption of those that are the least well off.
A second point made by Dr. McLaughlin is that regulations can often create a barrier to entry. Setting out on one’s own to start a business is as American as apple pie. It is an avenue that Americans throughout history have taken to climb from the poor house to the pent house.
But, the cost imposed by entry regulations can too often stand in the way. This directly limits opportunities of lower-income individuals who are the least likely to be able cut through the red tape and have money on hand to afford the associated costs.
Research by Dr. McLaughlin directly links entry regulations with income inequality. His study looked at the relationship between regulation and income inequality across 175 countries and found that stringent entry regulations are correlated with significantly higher levels of income inequality.
On the campaign trail we have heard Senator Sanders sing the virtues of Denmark in his crusade against inequality. Interestingly enough, Denmark scores very well in the World Bank’s “ease of doing business” ranking, which looks at the cost, time, and overall red tape in starting and running a business. In fact, Denmark is ranked third, while the U.S. lags behind in seventh and has been consistently falling backwards since 2008.
While Senator Sanders points to Denmark as model for the U.S. due to its tax and social welfare policies, it’s Denmark’s regulatory efficiency that deserves our attention.
In addition to reducing unnecessary regulatory barriers and built-in work disincentives, there is no question we need to do a better job ensuring individuals have the skills necessary to compete in the 21st century economy.
There has been considerable research demonstrating that the widening wage gap between skilled and unskilled labor has contributed to the growth in income inequality. I consistently hear from employers in Iowa who cannot find enough skilled workers to fill well-paying jobs. If we are to reduce income inequality, we must first reduce opportunity inequality.
We have an excellent system of community colleges in Iowa that train Iowans for jobs that are available in Iowa, but those who are chronically unemployed tend to lack the so-called “soft skills” that are necessary to hold down a job. In order to eliminate opportunity inequality, we must get back to the notion of the inherent dignity of work and ensure that hard work pays off.
These are just a few areas we should be able to work together on to increase opportunities for those least well-off among us.
Increasing opportunity should be our focus, not pitting American against American based on their socioeconomic status.
If we make increased opportunity our focus no one is required to be made worse off to benefit someone else.
In fact, by tearing down barriers standing in the way of hard working Americans, all Americans will benefit from higher productivity, higher wages, and higher economic growth.
My colleagues on the other side that are truly interested in reducing poverty and inequality should abandon their divisive politics of envy and instead work with Republicans on an agenda focused on economic growth and opportunity to benefit ALL Americans.
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