Donald Trump’s overhaul of the U.S. tax system will come at an estimated cost of $3 to $7 trillion over the next decade, largely in the form of tax cuts for large corporations and high earners. But for a president that campaigned on the proverbial “forgotten man,” why not spend one of those trillions on an equally massive tax cut for the working class?
That’s the essence of an audacious new proposal from freshman Congressman Ro Khanna, from California’s 17th district. Khanna has proposed doubling the Earned Income Tax Credit, while increasing the credit markedly for childless adults. The plan is inspired by a thought experiment Neil Irwin ran last year, in which he asked “What Would It Take to Replace the Pay Working-Class Americans Have Lost?” It turns out a trillion dollar boost to the EITC, America’s core wage subsidy program, would do the trick.
A new NBER paper sets the context:
We find that the lifetime income of the median male worker declined by 10% to 19% (depending on the price deflator we use), beginning with the cohort that turned 25 in 1967 and ending with the cohort that turned 25 in 1983. Perhaps more strikingly, more than three-quarters of the distribution of men experienced no rise in their lifetime income across these cohorts. The only time period during which the lifetime incomes of these men rose is from the 1957 cohort to the 1966 cohort.
You read that right: The median American male earned up to 19% less over their lifetime than earlier generations. It’s a finding that remains true even when non-wage benefits are accounted for. As the authors of the paper note, women experienced large wage gains over the same time period, but not nearly enough to offset the losses to men. Wage stagnation is real, and it has been with us for decades.
For whatever reason (and I have my own theory), median wages have become detached from overall economic growth. Indeed, there’s no theoretical reason to expect an efficient market to distribute the gains from productivity growth evenly. Which is where restructuring the tax code to create more broadly shared prosperity comes in. If the EITC is the program that “makes work pay,” Khanna’s idea is to make it really pay.
The way to think of this is not in terms of an arch imperative for income equality. Rather, since Serge-Christophe Kolm’s seminal work on distributive justice, social choice economists have tended to think of equitable growth in terms of a “no envy condition” that puts constraints over the set of social policies we can justly choose from. In very practical terms, we should always prefer policies that increase the productive potential of the economy, unless the way those gains are distributed risks destabilizing the very social contract that enabled growth in the first place (*cough* Trump *cough*). Khanna’s plan would be a much needed corrective to several decades of social policy that have only focused on that first half of our social contract.
Yet as the representative for a district in the heart of Silicon Valley, Khanna’s motivations are far more oriented towards preparing for the future than rectifying the past. He sees major disruptions to work on the horizon, with more and more routine jobs being automated by robots and artificial intelligence. The result will not be a lack of jobs, but rather a challenging period of transition to new jobs that leverage uniquely human capabilities like caring and emotional intelligence.
In future posts, I will take a deeper look at how Khanna’s plan, or something very much like it, could work to help smooth that transition, its potential draw backs, and much more.