(Bloomberg Opinion) -- I have news for you: The United States is becoming more redistributionist. Whether you like it or not.
The broader historical trends show that the US tax-and-transfer system is getting more progressive, including in recent years. And the US government is increasingly redistributing wealth to the bottom half of the income distribution.
This portrait belies the common view that the US doesn’t have a “real” welfare state, at least as compared to, say, the Nordic countries. Writers from left-leaning perspectives frequently claim that the US has “gutted” its welfare programs — even former President Bill Clinton, a Democrat, promised to “end welfare as we know it.”
The more accurate picture, less exciting though it may be, is that there is income redistribution in the US, either because voters think it is the right thing to do or because they hope to gain themselves from such a system. And as the US increases its wealth, it is redistributing more of it.
It’s not crazy to believe that the US tax system has become less progressive over the years. Before the tax reforms under former President Ronald Reagan, the top marginal rate was 70%. It fell for a while to 28%, and more recently has hovered in the 40s.
Nonetheless, a look at the entire tax-and-transfer system — and a consideration of income classes beyond the very top earners — reveals the system’s increasing progressivity.
The best information indicates that transfer income is rising over time, one example being the increasing numbers of states accepting the expansion of Medicaid under the Affordable Care Act. Even following the Clinton-era welfare reforms, the real resources that US governments (at all levels) sent to the poor continued to increase. Welfare itself became more temporary, but aid for food and child care, among other needs, rose in real value.
In a recent study, Thomas Coleman and David A. Weisbach of the University of Chicago focus on research of tax-and-transfer progressivity and establish some ground rules for judging its reliability: It should measure income comprehensively; look at both taxes and transfers; examine the issue over decades; and make their data available. Under these criteria, only three studies qualify. After scrutinizing that research, Coleman and Weisbach conclude:
Methodological choices produce some differences in the size of their estimates and the size of the trends, but the central story in all these studies is the same: the dominant change in the tax and transfer system over the past half-century has been an increase in transfers to the bottom. … All three studies show that the tax and transfer system has become more progressive and more redistributive.
If you are wondering: Yes, among those three studies are the data work of the academics Thomas Piketty, Emmanuel Saez and Gabriel Zucman, typically considered a left-leaning source, as well as the work of Gerald Auten and David Splinter, both of whom work for the US government and whose work has been embraced by some conservative and libertarian commentators. These sources do not agree on every question, and there has been a recent debate on whether the income share of the top 1% has been rising or holding steady. But on the growing redistribution toward the bottom half of the US income distribution, there is general accord.
As a share of national income, total transfers have gone up almost threefold — from 5.2% in 1966 to 15.3% in 2019. It is noteworthy, however, that total transfers to the bottom quintile peaked in 1975 in percentage terms, though they continued to rise in absolute terms. Governments at all levels in the US take special care to redistribute income to people in the middle quintiles, perhaps because they are more likely to vote than are the poor.
It’s also worth noting that the top marginal tax rate of 70% was never entirely binding; effective rates of taxation were lower than they looked. (I recall my father being given the use of a series of “company cars” in the 1970s largely to avoid taxable income.) More recently, in 2020, although published marginal income tax rates were lower, the top 10% of earners paid for 74% of the income tax burden, and the top quarter paid for 89%. Unlike most European nations, the US does not have a value-added tax to shift a big part of the burden back onto the middle class.
Cliches about the US are easy to come by. While conservatives like to suggest that income redistribution is by its very nature anti-American, progressives say that America is uniquely cruel in its rejection of the welfare state. Neither narrative is quite correct. As America gets more wealthy, the data show, it is redistributing more of its wealth.
Elsewhere in Bloomberg Opinion:
- The US Is Terrible at Collecting Taxes: Karl Smith
- Wealth Taxes Are Bad Economics: Allison Schrager
- The US Is a Low-Tax Nation — Unless You Earn a Lot: Justin Fox
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To contact the author of this story:
Tyler Cowen at [email protected]
