How to Help the Poor Without Taxing the Rich

In his latest New York Times column, Center on Budget and Policy Priorities fellow Jared Bernstein made the baseless claim that “to lift the poor, you can’t avoid taxing the rich.” Bernstein not only makes unfortunate policy recommendations, such as a Thomas Piketty-inspired global wealth tax, but also misses the mark on some basic facts. 

Here are four things Bernstein gets wrong:

Inequality is up, causing mobility to fall. Bernstein writes, “The rising tide of inequality does more than create great economic distance between income classes. It also produces higher barriers to mobility.”

Bernstein must be thinking of “The Great Gatsby Curve,” created by economists Miles Corak and Alan Krueger. The Curve allegedly proves greater income inequality reduces economic mobility.

However, research by Manhattan Institute senior fellow Scott Winship shows otherwise. The original Great Gatsby Curve was based on just ten countries and unreliable measures of mobility and inequality. When more accurate measures of mobility and inequality are used, the Great Gatsby Curve collapses to show no significant relationship between mobility and inequality. Furthermore, correlation is not causation. Higher inequality does not decrease mobility, but even if it did, attacking the wealthy would not help.

Stimulus 2.0 will create jobs for the poor. Bernstein says that economic growth alone cannot lift the poor out of poverty. Instead, “what will work here is a large, publicly funded infrastructure program to begin to repair our deteriorating public goods, with the jobs targeted at the working poor” (emphasis his).

Bernstein, along with Harvard University economist Larry Summers, seems to be asking for a second economic stimulus act for infrastructure, similar to the American Recovery and Reinvestment Act of 2009 that spent more than $100 billion taxpayer dollars on infrastructure. The first stimulus, passed in February 2009, was an unambiguous failure. By February 2010, the unemployment rate had risen by 1.5 percentage points, the labor force participation rate fell by .9 percentage points, and 3.6 million fewer people had jobs.

Looking at graphs of U.S. employment before, during, and after the Great Recession, it would be nearly impossible to point out where the stimulus took effect. A bump in employment centered on May 2010 can be attributed to government hiring for the U.S. Census, not the economic stimulus. Though the jobs were temporary, the 2010 Census spent just $13 billion, or about 1.5 percent of the $831 billion spent on the 2009 stimulus. Another economic stimulus will only increase employment for lobbyists bidding for the latest crony handouts from the government.

The US is collecting historically-low revenue. Bernstein writes, “The tax burden on all Americans, not just the wealthy, is low both in historical and international terms.” He attempts to argue that, because of low revenue, the government does not have enough money to spend on welfare for the impoverished.

Indeed, as he argues, the average federal tax rate and federal revenue as a percent of GDP is lower today than it was in 1990. However, the implication that this has left the government with insufficient revenue for welfare is untrue. According to the Census Bureau, in 1990 the government spent 9.5 percent of GDP on transfer payments. By 2010, this had risen to 15.3 percent of GDP.

Bernstein calls for more tax revenue to use on welfare payments for the impoverished, yet fails to acknowledge that these payments have actually increased over the last two decades.

Universal preschool will make workers more productive. Research shows that Head Start programs for preschoolers make little to no impact by the time participants reach third grade, in spite of the $8 billion a year spent on the program. An October 2012 report on the program published by the Department of Health & Human Services found no improvement in reading, writing, or math skills by the time students reached third grade. Bernstein overlooks a far better way to help the poor “invest in their future productivity,” which he claims is just one of three reliable ways to lift the poor from poverty.

School choice programs such as charter schools, tax credits for tuition, and scholarship accounts have proven to be remarkably successful at improving educational outcomes. Studies focusing on charter schools have shown that they have done particularly well helping students from under-served backgrounds. All this is possible without increasing taxes: multiple comprehensive reviews and case studies of school choice programs have found they save taxpayer money. The problem with schools is not that they lack sufficient money, “but how that money is actually being spent, and the culture of the institutions spending it,” according to another New York Times columnist, Ross Douthat.

Countries with more economic freedom, meaning lower taxes, less regulation, and smaller government, have significantly less poverty than countries with high taxes. If America could simply tax its way to prosperity, would it not already be doing so? Lower taxes attract the employers that create jobs with the potential to lift people out of poverty and into well-paying careers. Not only would raising taxes on the rich do nothing to help the impoverished, but cutting taxes and opening markets to create jobs will decrease poverty.

Jason Russell is a research associate at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.

Interested in real economic insights? Want to stay ahead of the competition? Each weekday morning, e21 delivers a short email that includes e21 exclusive commentaries and the latest market news and updates from Washington. Sign up for the e21 Morning eBrief.