INCOME INEQUALITY….Budget deficits come and go, and while the long term deficits that George Bush’s tax cut envisions are a bad thing, they’re only mildly bad. Much worse, I think, are two other long term trends that don’t get as much attention: (a) the ever growing trade deficit, which puts us at considerable risk if the rest of the world ever loses confidence in our economy, and (b) growing income inequality in the United States.

Yesterday in the New York Times, Daniel Altman argued that income inequality doesn’t get the attention it deserves from economists because it largely involves questions of fairness rather than objectives measure of economic performance. He says this is changing, and this is good news since there are several practical reasons to be concerned about rising income inequality:

  • A vigorous middle class has always been the cornerstone of sustained economic growth. A stagnant middle class, as we’ve had for the past couple of decades, is bad news for future growth prospects.

  • As wealth increases in the upper income classes it leads to increased speculation (what else can they do with their money, after all?) and thence to savage boom and bust cycles. The dotcom boom/bust is the most recent example of this.

  • Historically, rising income inequality has lead to disaster. The reasons are many, but in the end they hardly matter. Whatever the cause, high income inequality has a history of signalling the onset of decline by world-dominant nations such as ours.

Our current levels of income inequality should be a danger signal to anyone concerned about our children’s future, but instead the Bush administration is doing everything it can to exacerbate the problem. The consequences of this are legion and will be felt for decades after Bush has left office and gone into retirement in Crawford.

What should we be doing instead to encourage a robust middle class economy and diminish the destabilizing, inter-generational fortunes of the super rich? Two things:

  • Revising the tax code to (a) eliminate the regression of the payroll tax and (b) increase top marginal income tax rates.

  • Increasing, not decreasing, the inheritance tax. Allowing the idle offspring of the rich to live forever off the earnings of others is no part of the American Dream. We should increase the inheritance tax on the wealthy and use the proceeds to decrease income and payroll taxes on the poor and middle class.

Conservative tax ideology has become practically a theology in recent years, to the point where I doubt its practitioners have any idea of the damage they’re doing. But doing damage they are, and sooner or later someone is going to have to clean up their broken crockery and get our country back on track toward sustained economic growth that actually benefits everyone, not just the lucky top 5%. The sooner the better.