The Newest Sin Tax

Former U.S. Deputy Treasury Secretary Robert Altman writes in the Financial Times that increasing income inequality in the U.S. has three causes: the increasing role that information technology plays in work; a supply shortage of workers with the requisite IT skills to take full advantage of this shift; and weak rates of graduation from high schools and universities.

The irony is that the first policy proposal Altman offers to remedy what he sees as the problem of income inequality is to make the U.S. income tax more progressive”that is, to increase the tax rates on folks who earn higher salaries.

There are a couple of problems with increasing tax rates given his diagnosis of the causes of U.S. income inequality. To understand the first of these we need to step back to consider why Altman might think that the three factors he identifies would cause increased income inequality.

First, jobs that better leverage information technology allows those workers to be more productive. More productive workers earn more money, and income inequality increases as a result of these workers receiving higher pay relative to workers whose labor employs less information technology. This is just a special case of the conventional wisdom in economics that labor productivity is a function of the combination of capital and labor. The marginal product of labor will increase by adding capital to a given amount of labor, and hence the income for that labor will increase as well.

Secondly, Altman argues that the supply of workers with IT skills is low relative to demand. This contributes to income inequality because high demand for workers with IT skills relative to supply means that employers seek to attract more-skilled workers by paying them higher wages. This is just supply and demand in the labor market.

Finally, Altman suggests that schools are underproducing workers who can supply the IT skills that employers want. Therefore, again, because supply for these workers is less than demand, and the outcome is that workers with the requisite IT skills receive higher incomes. This exacerbates income inequality relative to workers who do not graduate from high schools or universities.

Altman’s proposal to increase the progressivity of the income tax means that he proposes to reduce income going to workers with scarce IT skills relative to what they earn right now. His proposal would reduce the incentive that people have to invest in their IT skills. That is, Altman’s proposal decreases incentive that people have to acquire the very skills that Altman argues cause income inequality because they are already in short supply.

High wages in a market signals to workers that demand for their skills exceeds supply in that market, and so attract workers into that market. The upshot of Altman’s proposal to increase the progressivity of U.S. income taxes would be to exacerbate the very factors that he thinks are causing the inequality that he laments.

The next odd thing about Altman’s proposal to increase income-tax progressivity is that, for Altman, increasing tax rates is its own reward”an increasingly progressive tax by itself would flatten out income inequality, and therefore meets his objective to reduce income inequality irrespective of what any additional tax revenue would be spent on.

Altman’s goal here is brute redistribution. His justification for raising taxes rates on higher-earning Americans depends neither on the need to invest additional revenues in public goods nor in policies that would increase incomes for lower-earning Americans. Even if the government just burned the extra cash raised by increasing taxes on higher-income Americans, Altman’s goal of reducing income inequality would be reached.

Basically, Altman proposes higher income tax rates as a sort of sin tax on people who earn higher incomes. The irony is that Altman next proposes increased investment in education to help reduce income inequality. While one can argue about the specifics of education policy, Altman’s proposal here at least has the benefit of aiming to reduce inequality by increasing the wages of low-paid workers. This avoids the perversity of reducing incentives that low-paid workers have to increase their IT skills, and then taking away income from those workers who nonetheless obtain the skills that Altman believes more of us should have.

James R. Rogers is Associate Professor of political science at Texas A&M University and editor of the Journal of Theoretical Politics.

RESOURCES

Robert Altman, No More Inaction on Income Inequality

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