[Congressional Record (Bound Edition), Volume 162 (2016), Part 5]
[Senate]
[Pages 6005-6007]
[From the U.S. Government Publishing Office, www.gpo.gov]




                           INCOME INEQUALITY

  Mr. GRASSLEY. Mr. President, I ask unanimous consent to have printed 
in the Record a copy of a newspaper article at the conclusion of my 
remarks.
  Income inequality has been a hot topic this campaign season. It has 
become the rallying cry of the left to support their economic agenda. 
Whether it is taxing the rich, raising the minimum wage, combating 
global warming, or any other number of policies. If you listen to 
Secretary Clinton and Senator Sanders on the campaign trail, you would 
get the impression that income inequality is the fault of Republicans. 
They contend that their preferred policies will close the gap between 
the rich and the poor. However, the inconvenient fact is that 
inequality rose considerably more under President Clinton than it did 
under President Reagan. Further, it has increased more under President 
Obama than it did under President Bush.
  For any of my colleagues wondering how this could be the case, I 
would encourage them to read Lawrence Lindsey's op-ed that ran in the 
Wall Street Journal in March.
  Mr. Lindsey's article title ``How Progressives Drive Income 
Inequality'' details how liberal policies have not only failed to 
reduce income inequality, but may in fact be contributing to it.
  For instance, my colleagues on the left all too frequently look to 
ever richer and more expansive transfer payment programs as the 
solution. However, too often our existing transfer programs meant to 
help the less fortunate act as an anchor preventing Americans from 
climbing up the income ladder.
  This risks creating a permanent underclass of citizens that are 
dependent on the state for their basic needs. That may be the dream of 
European- style Social Democrats, but it is most certainly not the 
American Dream.
  The Congressional Budget Office looks at this effect in terms of 
marginal effective tax rates on low and moderate income workers. This 
refers to how much extra tax or reduction in government benefits is 
imposed on an--American worker when he or she earns an additional 
dollar of income.
  CBO estimates that in 2016 those under 450% of the federal poverty 
level will face an average effective tax rate of about 41%. Keep in 
mind that this is just the average. CBO demonstrates how a substantial 
number of workers could experience marginal effective rates exceeding 
50, 60, or even 80%, which is far higher than the top statutory rate of 
39.6% paid by the wealthiest Americans.
  The end result is a worker facing these rates may just decide it 
doesn't make much sense to take on extra hours or put in the effort to 
learn extra skills to increase their earnings potential. Historically, 
this has impacted married women in the workforce most of all as they 
are more likely than men to drop out of the workforce completely as a 
result.
  Discouraging individuals from entering the labor force, taking on 
more work hours, gaining extra experience, or learning new skills, is a 
recipe for stagnate incomes and increased income disparity. But, far 
from seeking to address these work disincentive effects, President 
Obama has made it worse for millions of workers. Take the premium tax 
credit enacted as part of the Affordable Care Act for instance. CBO 
estimates it will raise marginal tax rates by an estimated 12 
percentage points for recipients.
  Secretary Clinton and Senator Sanders also have provided no 
indication they would reverse this trend. In fact, they appear to only 
be interested in exacerbating this problem through richer transfer 
programs, increased costs on employers, and increased payroll taxes.
  The scapegoat of the income inequality debate on the left has, of 
course, been the much-hyped top 1 percent. Here we are told that if we 
just tax the rich, we can solve all of our problems and address income 
inequality in one fell swoop.

[[Page 6006]]

  But, if increased taxes on the wealthy is a solution to income 
inequality, why--as I pointed out at the start of this speech--did 
income inequality grow faster under President Clinton than under 
President Reagan? And why has income inequality grown faster under 
President Obama than under President Bush?
  The fact of the matter is that taxing the wealthy to reduce income 
inequality at best is a fool's errand and at worst could be a blow to 
our economy--potentially harming individuals at all income levels.
  A recent research paper by the liberal Brookings Institution looked 
directly into the question of whether substantially increasing taxes on 
the wealthy would reduce income inequality. To quote their findings, 
``An increase in the top tax rate leads to an almost imperceptible 
reduction in overall income inequality, even if the additional revenue 
is explicitly redistributed.'' Raising taxes might be successful at 
generating revenue to fund greater wealth transfer payments. But it 
does nothing to rectify the ``opportunity gap.''
  Soak the rich policies do not create greater opportunity for low-
income individuals. In fact, wealth transfer policies often have the 
perverse effect of trapping their intended beneficiaries in soul-
crushing government dependency. Moreover, because of their negative 
effects on economic growth and capital formation, they can reduce 
opportunity for all Americans. You do not have to take my word for the 
anti-growth effects of increasing taxes. Research by Christina Romer, 
President Obama's former chief economist, found that a tax increase of 
1% of GDP reduces economic growth by as much as 3%.
  According to this study, tax increases have such a substantial effect 
on economic growth because of the ``powerful negative effect of tax 
increases on investment.''
  In effect, what those who pursue wealth-destroying redistributionist 
policies are really saying--to quote Margaret Thatcher--is that they 
``would rather that the poor were poorer, provided that the rich were 
less rich.'' That may result in less differences in wealth between 
Americans, but the expense of making us all worse off. Our goal must be 
to create wealth and opportunity for ALL Americans.
  We should reject the notion that in order to improve the lot of one 
individual, someone else must be made worse off. The leadership of 
other side has become fixated on redistributing the existing economic 
pie. The better policy is to increase the size of the pie. When this 
occurs, no one is made better off at the expense of anyone else. This 
is best achieved through pro-growth policies aimed at growing the 
economic pie, not by taking from some and giving to others.
  Instead of seeking to reduce inequality by knocking the top down a 
few pegs on the income ladder, policies should be focused on helping 
individuals climb upwards by tearing down barriers that stand in their 
way. We all agree with the need for a sound safety net to protect the 
most vulnerable among us. But when that safety net begins to act like 
an anchor holding people back, we need to be brave enough to chart a 
new course. This is what we sought to do with welfare reforms in 1994 
through work requirements and incentives. It is once again time for us 
to review and reform programs so as to minimize as much as possible the 
current built-in work disincentives from transfer programs that I 
discussed earlier.
  Another often overlooked issue is the burden overregulation imposes 
on low-income individuals.
  Dr. McLaughlin of the Mercatus Center in testimony before a Senate 
Judiciary subcommittee hearing earlier this year discussed two negative 
impacts regulation can have on low-income households.
  First, while it is well recognized that regulations can increase 
transaction costs for businesses, it is equally true that consumers 
feel the costs in the form of higher prices. Since low-income 
households tend to spend, rather than save, a much larger share of 
their income, they are the ones hit hardest by the regulatory costs. In 
this regard, regulation acts much like a regressive tax on the 
consumption of those that are the least well off.
  A second point made by Dr. McLaughlin is that regulations can often 
create a barrier to entry. Setting out on one's own to start a business 
is as American as apple pie. It is an avenue that Americans throughout 
history have taken to climb from the poor house to the penthouse. But, 
the cost imposed by entry regulations can too often stand in the way. 
This directly limits opportunities of lower-income individuals who are 
the least likely to be able to cut through the red tape and have money 
on hand to afford the associated costs. Research by Dr. McLaughlin 
directly links entry regulations with income inequality. His study 
looked at the relationship between regulation and income inequality 
across 175 countries and found that stringent entry regulations are 
correlated with significantly higher levels of income inequality.
  On the campaign trail we have heard Senator Sanders sing the virtues 
of Denmark in his crusade against inequality. Interestingly enough, 
Denmark scores very well in the World Bank's ``ease of doing business'' 
ranking, which looks at the cost, time, and overall red tape in 
starting and running a business. In fact, Denmark is ranked third, 
while the U.S. lags behind in seventh and has been consistently falling 
backwards since 2008. While Senator Sanders points to Denmark as a 
model for the U.S. due to its tax and social welfare policies, it is 
Denmark's regulatory efficiency that deserves our attention. In 
addition to reducing unnecessary regulatory barriers and built-in work 
disincentives, there is no question we need to do a better job ensuring 
individuals have the skills necessary to compete in the 21 century 
economy.
  There has been considerable research demonstrating that the widening 
wage gap between skilled and unskilled labor has contributed to the 
growth in income inequality. I consistently hear from employers in Iowa 
who cannot find enough skilled workers to fill well-paying jobs. If we 
are to reduce income inequality, we must first reduce opportunity 
inequality.
  We have an excellent system of community colleges in Iowa that train 
Iowans for jobs that are available in Iowa, but those who are 
chronically unemployed tend to lack the so-called ``soft skills'' that 
are necessary to hold down a job. In order to eliminate opportunity 
inequality, we must get back to the notion of the inherent dignity of 
work and ensure that hard work pays off.
  These are just a few areas we should be able to work together on to 
increase opportunities for those least well off among us. Increasing 
opportunity should be our focus, not pitting American against American 
based on their socioeconomic status. If we make increased opportunity 
our focus, no one is required to be made worse off to benefit someone 
else. In fact, by tearing down barriers standing in the way of 
hardworking Americans, all Americans will benefit from higher 
productivity, higher wages, and higher economic growth.
  My colleagues on the other side who are truly interested in reducing 
poverty and inequality should abandon their divisive politics of envy 
and class warfare Instead, work with Republicans on an agenda focused 
on economic growth and opportunity to benefit ALL Americans.
  I yield the floor.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                             [Mar. 4, 2016]

                How Progressives Drive Income Inequality

                        (By Lawrence B. Lindsey)

       Hillary Clinton and Bernie Sanders are promising all types 
     of programs to make America a more equal country. That's no 
     surprise. But when you look at performance and not rhetoric, 
     the administrations of political progressives have made the 
     distribution of income more unequal than their adversaries, 
     who supposedly favor the wealthy.
       The Census Bureau releases annual updates on income 
     distribution in the U.S., publishing three technical 
     statistical measures--the Gini index, the mean logarithmic 
     deviation of income (mean log deviation for

[[Page 6007]]

     short), and the Theil index--each of which represents 
     inequality levels on a scale of 0 to 1 (zero signifies 
     perfect equality and 1 indicates perfect inequality). By all 
     three measures, inequality rose more under Bill Clinton than 
     under Ronald Reagan. And it wasn't even close. While the 
     inequality increase as measured by the Gini index was only 
     slightly more during Clinton's two terms, the Theil index and 
     mean log deviation increased two and three times as much, 
     respectively.
       Barack Obama's administration follows this pattern, despite 
     the complaints he and his supporters have made about his 
     predecessor. The mean log deviation increased 37% more under 
     Mr. Obama than under President George W. Bush, although when 
     this statistic was released, Mr. Obama had only six years as 
     president compared with Mr. Bush's eight. The Gini index rose 
     more than three times as much under Mr. Obama than under Mr. 
     Bush. The Theil index increased sharply during the Obama 
     administration, while it fell slightly under Bush 43.
       Sure, no president intends to raise inequality. And the 
     spin doctors for Messrs. Clinton and Obama may insist that it 
     wasn't their fault.
       But consider their policies. Both Democratic presidents 
     presided over bubble economies fueled by easy monetary 
     policy. There is no better way to make the rich richer than 
     to run policies that push up the price of financial assets. 
     Cheap money is a boon to those who have access to it. 
     Interest rates were also too low under Bush 43, but that 
     bubble was in housing, and the effects were therefore more 
     evenly distributed than under Mr. Clinton's stock-market 
     bubble or Mr. Obama's credit bubble.
       Money matters, but so do other policies, such as the long, 
     historic sweep of the expanding welfare state. In 1968, 
     government transfer payments totaled $53 billion or roughly 
     7% of personal income. By 2014, these had climbed to $2.5 
     trillion--about 17% of personal income. Despite the 
     redistribution of a sixth of all income, inequality measured 
     by all three of the Census Bureau's indexes is far higher 
     today than in 1968.
       Transfer payments under Mr. Obama increased by $560 
     billion. By contrast private-sector wages and salaries grew 
     by $1.1 trillion. So for every $2 in extra wages, about $1 
     was paid out in extra transfer payments--lowering the 
     relative reward to work. Forty-five million people received 
     food stamps in mid-2015, an increase of 46% since the end of 
     2008. Similarly, 71.6 million individuals were enrolled in 
     Medicaid and the Children's Health Insurance Program, an 
     increase of 13.3 million since October 2013.
       In 2008, during the deepest recession in 75 years, 13.2% of 
     Americans lived below the government's official poverty line. 
     The Great Recession officially ended in June 2009, but in 
     2014, after five years of economic expansion, 14.8% of 
     Americans were still in poverty. The economy was better, and 
     there were a lot more handouts, but still poverty rose.
       The structure of American households shows how this 
     happened. From 2008 through 2014, the most recent year for 
     which we have data, the number of two-earner households 
     declined. These two-earner households have become the 
     backbone of the American middle class.
       Research by the Hamilton Project and the Urban Institute 
     show that when families with children making between $20,000 
     and $50,000 attempt to have a second earner go back to work, 
     the effective tax rate on the extra earnings--including lost 
     government benefits such as food stamps, the earned-income 
     tax credit, and medical support payments--is between 50% and 
     80%. This phaseout of the ever increasing array of benefits 
     has created a ``working-class trap'' instead of a ``poverty 
     trap'' that is increasing inequality and keeping the income 
     of these households lower than they might otherwise be.
       While the number of two-earner households declined during 
     the first six years of the Obama presidency, the number of 
     single-earner households rose by 2.6 million and the number 
     of households with no earners rose by almost five million. In 
     other words, two thirds of the increase in the number of 
     families under Mr. Obama was accounted for by households with 
     no one working. This is the reason the middle class has 
     shrunk, and the reason inequality has increased. And unless 
     we increase the number of people wanting to work and the 
     number of jobs through economic growth, inequality will only 
     increase.
       The flip side of the progressive agenda to redistribute 
     income to those with less is to raise taxes on the ``rich.'' 
     The data show that it is also an ineffective way to reduce 
     inequality.
       President Clinton increased the top tax rate on higher 
     earners--yet inequality rose during his administration, and 
     faster than under the tax-cutting Ronald Reagan. The same 
     happened under President Obama. Tax rates went up on upper-
     income earners. Inequality rose too, and more than under his 
     tax-cutting predecessor.
       A recent Brookings Institution study--whose authors include 
     Peter Orszag, President Obama's director of the Office of 
     Management and Budget--found that boosting the top tax rates 
     even more, as Sen. Sanders suggests, would have little or no 
     effect on inequality. The paper explored the effects of 
     raising the highest marginal income-tax rate to 50% from 
     39.6%. Assuming no behavioral effects, the expected revenue 
     was then distributed directly (and in theory costlessly) to 
     the bottom 20% of income earners.
       The $95 billion in extra taxes and transfers reduced the 
     Gini Coefficient by only 0.003. To put that in perspective, 
     that reversed only one fifth of the increase in inequality 
     during the Obama presidency.
       There was a catch. When the authors assumed that there 
     might be a behavioral response by higher income taxpayers, 
     inequality fell--but for the wrong reasons. Less work, 
     saving, investing and more tax sheltering reduced the taxable 
     income of higher earners and therefore meant less revenue to 
     redistribute So the rich got poorer, by their own choice, but 
     the poor got less in benefits. A true lose-lose situation.
       None of this should really be surprising. If the socialist 
     ideal of ``from each according to his ability, to each 
     according to his need'' worked in practice, the Berlin Wall 
     might still be standing. Of course, one of the reasons it 
     came down is that a new ruling class emerged to take from the 
     productive and give to those in need, siphoning off a cut of 
     the swag along the way. Ruling classes always have sticky 
     fingers.
       Redistribution through the political process is not 
     costless--even in a perfect world there would be a large 
     bureaucracy to feed. Special-interest elites also emerge when 
     so much money is being moved around. They take their cut, 
     introducing even more inefficiency into the system.
       Presidential contenders who boast of their plans to reduce 
     inequality might ponder the fact that providing more free 
     things is not the answer. Even free college and free health 
     care are paid with taxes that discourage people from 
     increasing their work, savings and entrepreneurship.
       Attacking the rich and running against inequality may be a 
     sensible political strategy. But in the end the programs to 
     implement this strategy make the problem worse. Yet advocates 
     come back and demand the same programs. That is perilously 
     close to the definition of insanity attributed to Einstein: 
     doing the same thing over and over again and expecting 
     different results.
       The repeated failure of political promises has another 
     downside--increasing voter alienation and cynicism. The 
     appeal of redistribution is understandable, but voters who 
     think the progressives running today are going to reduce 
     inequality are falling into the same trap as people entering 
     fifth or sixth marriages--the triumph of hope over 
     experience.

  The PRESIDING OFFICER. The Senator from Maine.

                          ____________________