Yale economist and Nobel laureate Robert Shiller is warning about the consequences of waiting too long to address rising income inequality.
Shiller recently addressed the topic in an interview with Brookings/WSJ’s David Wessel, in which he explained why we should consider raising taxes on the rich now. “[T]he nice thing is that when you talk to people about risks of the distant future, they are more idealistic and more sharing in their attitudes,” he said.
In a new piece for The New York Times Sunday, Shiller expands on the immediacy problem, and how to do it through taxes. “[W]hile income inequality would be much worse without our current tax system, what we have isn’t nearly enough,” he writes. “It’s time — past time, actually — to tweak the system so that it can respond effectively if income inequality becomes more extreme.”
Shiller makes two points. First, he details how the problem will get worse the longer we wait to address it.
If we wait until income inequality is much more severe, we will have a whole class of new superrich who will probably feel entitled to their wealth and will have the means to defend their interest. That’s already gone far enough. We shouldn’t let it become more extreme.
Shiller cites a psychology study showing how to take advantage of people at their most generous:
It is what the psychologists Yaacov Trope of New York University and Nira Liberman of Tel Aviv University called temporal construal theory. They showed that people are more idealistic and generous when dealing hypothetically with the distant future than they are about actions they need to take today. That’s why it pays to ask people to decide on measures to uphold egalitarian ideals when they don’t have to cough up the money immediately.
So what can be done now that would be politically feasible? Shiller proposes indexing tax brackets to inequality metrics, the same way it’s indexed to inflation. Shiller and Leonard Burman and Jeffrey Rohaly of the Urban-Brookings Tax Policy Center first discussed this in 2006. Last month, Burman actually presented such a proposal at a Senate Finance Committee hearing last month. Here’s what Shiller says about Burman’s updated version of plan:
His idea was to integrate inequality indexing with inflation indexing: Instead of just linking tax brackets to inflation as measured by the Consumer Price Index, as we have done for years, he proposed that the adjustments also take account of rising inequality, if it occurred. He proposed a system to offset the loss in tax revenue that inflation indexing would produce, in a way that would get us closer to a target distribution of after-tax income; if inequality worsened, higher tax brackets would bear a bit more of the burden, and people at the bottom would bear less.