The only solution to America’s income inequality problem

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It is widely recognized that growing inequality is the greatest challenge facing the United States in the years ahead. The gap between the few who have benefited from the post-crisis corporate and financial boom and the many who have not is growing to unmanageable proportions. Even the rich increasingly recognize that this situation is untenable.

The question is what to do about growing inequality. Progressives wish for the return of the pre-1970s equilibrium with relatively strong unions, defined-benefit plans and high income tax rates on the wealthy. But the forces of globalization render this outcome exceedingly unlikely, even if the political will were found. The U.S. cannot afford to shut its borders to competition from workers overseas who are willing to accept much lower wages and benefits for the same level of productivity.

We need to continue to be a world leader in innovation and entrepreneurship. But we cannot do so without ensuring a strong safety net for the middle class, because without such a safety net, the majority of voters will turn against globalization and toward protectionism and isolation. As we approach the 100th anniversary of World War I, we should never forget how the previous golden age of globalization ended with tariffs, immigration restrictions, a Great Depression and mass slaughter.

Therefore, we should not cut Social Security, Medicare and Medicaid, and we should fund Obamacare, even if not enough healthy young people sign up to subsidize those with pre-existing conditions and the previously uninsured. But how can we afford to do all of this?

Not by borrowing more from China, because this makes us dangerously dependent on our main geopolitical rival. And not by raising income or payroll taxes, because high tax rates discourage work and productivity and encourage tax evasion. Moreover, we should not ask the young to fund programs that primarily benefit the old.

The only solution is to do what most other advanced economies with more robust social safety nets have done: Enact a broad federal consumption tax. Unlike income and payroll taxes, consumption taxes do not discourage work, and because the old as well as the young consume, they are borne in significant part by the principal beneficiaries of the social safety net.

Social Security, Medicare and Medicaid are inherently progressive programs: They benefit the poor much more than the rich. Enacting an additional consumption tax on top of the existing income and payroll taxes is not a move toward a regressive tax system if the revenues are dedicated to funding the entitlement programs.

After the financial crisis, most baby boomers do not have nearly enough savings for retirement. Cutting benefits and raising the retirement age are the wrong way to deal with people who have worked their entire life with the expectation that these programs will provide in their old age.

But we cannot put the entire burden on the young. A broad federal consumption tax is the only fair way forward.

Courtesy of The Detroit Free Press

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