We can’t shrink the wealth gap if we don’t reform the tax code

The wealth gap these days is the subject of an acclaimed documentary, viral videos and countless articles and opinion pieces.  But even as the concept infiltrates popular culture, have we moved any closer to understanding it?

How did it come to pass that more than four-fifths of the wealth in this country is owned by the richest fifth of households? Or that for every dollar in wealth owned by white households, just 5-7 cents is held by African American and Hispanic families?

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The causes of wealth inequality are complex, but one big one is too often ignored – the tax code. In 2012, the United States actually spent more on tax expenditures – deductions, deferrals, exclusions, preferential rates and credits – than we collected in individual income tax receipts.  These tax expenditures have gone overwhelmingly to the richest Americans.  The annual bounty to the wealthiest quintile is now roughly half a trillion dollars a year.  

For three of the largest tax expenditures – preferential rates on capital gains, the home mortgage interest deduction and the property tax deduction – the wealthiest 1 perrcent of households collected nearly a third of the benefits in 2009. Middle and low-income households collected less than 5 percent. People making more than $1 million a year received an average of $96,000 from these tax benefits while those in the poorest quintile got less than $5.

While there is little appetite among federal budget negotiators in Congress to address these enormous inequities in the tax code, without real reform the wealth gap will grow further and our nation will continue on a perilous economic path. 

The real issue is not so much that we reward the rich, but that when it comes to savings and asset building incentives in the tax code, we miss the middle and penalize the poor. 

This is simply bad policy. Three decades of pilot programs, research and evaluation in real communities across this country has proven that given the opportunity, low income and even very poor people living at half the poverty line will save, start businesses, buy and keep homes, go to college, and create economic futures for themselves and their families. 

Savings not only help middle and low income families move up the economic ladder, they also have a significant impact on economic growth.  Most new businesses – the source of virtually all jobs created in the last 30 years – are funded out of personal savings and savings of friends, family and associates.  And new research shows that low and moderate income kids with as little as $500 or less in college savings are three times more likely to go to college and four times more likely to graduate than those without a savings account. 

What should we do if we want to shrink the wealth gap, stimulate widespread economic growth, and reduce or improve the efficacy of tax expenditures? 

First, we should provide an effective savings match/incentive at least to the asset-poor majority of Americans, by installing a universal, refundable savers credit. For less than 5% of current asset expenditures, we could offer a $100-$500 savings incentive to every American.  This investment would likely pay for itself several times over in terms of savings leveraged and the returns on those investments.

Such proposals have been introduced in Congress before by bipartisan teams, and advanced by such diverse organizations as the AARP, the Center for American Progress and the Heritage Foundation. 

If necessary, financing such an investment could be easily covered by savings from existing asset tax expenditures of questionable effectiveness.   As Sens. Orin Hatch (R-Utah) and Max BaucusMax BaucusWyden unveils business tax proposal College endowments under scrutiny The chaotic fight for ObamaCare MORE (D-Mont.) recently suggested, we could start from scratch:  Eliminate all tax expenditures, at least conceptually, and then add back only those that can be shown to grow the economy, make the tax code fairer or effectively promote important policy objectives.  Alternatively, we could simply cap or limit individual tax expenditures such as the home mortgage deduction or groups of tax expenditures.

We need also to remove or raise asset limits from federal and state benefits programs such as welfare and disability benefits, so that the poor are no longer penalized for doing exactly what they should if they want to move up – save, work, go to college, start businesses, buy homes and prepare for retirement. 

The genius of the American economy has long rested on our belief in the productive capacity of common Americans.  It is high time we refocused our tax code to invest in those struggling to gain a financial toehold in the American Dream.  The result is likely to be not only a fairer America but a more productive one that includes millions of additional businesses and jobs, secure homeowners, skilled workers – and justly hopeful kids.

Friedman is the founder, chair of the Board and general counsel for the Corporation for Enterprise Development (CFED). A recognized pioneer in the asset-building and economic development movement, he received the Presidential Award for Excellence in Microenterprise Development from President Bill ClintonBill ClintonTrump: Clinton 'dishonest' and an 'enabler' For Clinton, there's really only one choice for veep Poets and artists expose the failure of immigration detention MORE in 1999.

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