Wealth, Poverty and Policy

Jan 30, 2012

By Jenice R. Robinson and Hannah Matthews

The defining issue of our time is how to keep alive the promise that hard work pays off, to paraphrase President Obama. During his recent State of the Union address, he noted that the spoils of our economy are being concentrated in fewer hands while an increasing number of people find it difficult to make ends meet.

The growing income divide was true long before the recent economic meltdown, but it's become more apparent as the percent of people living in or near poverty continues to increase and as more workers either struggle to find jobs or settle for employment that pays significantly less than they previously earned.  The question for public debate is what role policy should play in increasing opportunity and reducing economic inequality.

The same day as the president's SOTU address, the tax fairness issue made front page news because presidential candidate Mitt Romney released tax information for 2010 and 2011, revealing an effective federal tax rate around 14 percent, which is significantly lower than the overall average tax rate of 20.4 percent (averaged across all incomes levels).

How did we arrive at a place where people who have high net worth pay lower effective tax rates than many middle class people whose annual income comes from work, rather than from investments, dividends, or capital gains? Delving into these questions draws accusations of class warfare in some circles, but such finger pointing is a red herring. No one begrudges the wealthy their riches. It is the American Dream that with hard work and good luck, perhaps you too could be rich. The question is foremost about fairness and, again, the role our nation's policies play in family economic well-being.

The Bush tax cuts in 2001 reduced the capital gains tax rate from 20 percent to about 15 percent. This reduction came after, in the 1990s, Congress passed and President Clinton signed into law a measure lowering the capital gains tax rate from about 28 percent to 20 percent, a rate that also had prevailed for much of the Reagan years. In other words, our elected officials put in place policies that allow the wealthy to pay a lower percentage in taxes than, in many cases, working people.

But just as public policy has a role to play in setting tax rates for income earned from work and from wealth, it also can play a role in reducing poverty and promoting opportunity.

When the U.S. Census released its first Supplemental Poverty Measure last fall, it included calculations on how public benefits reduce poverty. Programs such as the Earned Income Tax Credit, Supplemental Nutrition Assistance Program (SNAP or food stamps) benefits, and school lunch reduced the share of individuals in poverty, and children in particular. Specifically, it noted that the EITC reduced poverty among children by 4.2 percentage points, SNAP benefits by 3 percentage points, housing subsidies by 1.3 percentage points, and school lunch by 0.8 percentage points. The Census report on Poverty, Income and Health Insurance Coverage in 2010 revealed unemployment insurance benefits kept 3.2 million out of poverty and Social Security kept 20 million people out of poverty.

In other words, without government intervention, millions more in our communities would be poor.

And while our public policies helped keep millions out of poverty, nearly one in seven of us are poor. Unemployment may be declining, but at 8.5 percent it is still high. Median incomes are declining and wages are stagnant.

Bringing up the very real issue of growing economic inequality and the struggles of low- and middle-income families should not incite charges of class warfare but instead should stoke spirited public debate on how we reverse it and move the nation back to one that lives up to its ideals. If, as the president said, the defining issue of our time is how to keep alive the promise that hard work pays off, then we must actively invest in creating a society that lives up to that expectation and promotes opportunity, even in this difficult economic climate.

A national poll released by Pew last May revealed a majority (58 percent) of Americans believe the government has a role in promoting economic mobility.

The results demonstrate support for policies that facilitate people's ability to climb the income ladder: ensuring all children get a quality education (88 percent); promoting job creation (83 percent); ensuring equal opportunity (79 percent); letting people keep more of their money (78 percent); and providing basic needs to the very poor (75 percent).  

Promoting the American dream means comprehensive policy solutions that take a balanced, fair approach to taxes, as well as spending and reducing deficits. At the same time, we must also sustain the vital hand of government for those in need. 



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