Recently, political scientist Larry Bartels produced a stunning chart showing the dramatically different impacts that Republican and Democratic Presidents have on income distribution:
But how? Two new studies suggest that an incredibly important mechanism by which Democrats and Republicans shift the distribution of income is the tax system.
The first study, from political scientists Christopher Faricy and Christopher Ellis, examines how individuals perceive the same social spending that occurs through direct spending and through a tax expenditure. They find that support for spending is higher when the spending is spent through tax expenditures rather than directly spending the money. The authors also find that when the public is aware of distributive effects of tax benefits, it shifts support. For instance, when the public is made aware of how the retirement income deduction and mortgage interest deduction benefit the rich, that pulls down support for the programs. Of course, these effects were mediated by partisanship: Republicans were more concerned to whether the spending was direct or through the tax system, while Democrats were more sensitive to the distributional effects.
These results suggest why programs like the Earned Income Tax Credit can attract bipartisan support: Conservatives like that it’s a tax credit, while progressives like its redistributive effect. Economists, meanwhile, like that it’s a direct income support for low and moderate income families. And centrist wonks like that it’s tied to work, and that it’s not the minimum wage.
It’s likely that progressives can leverage this effect to get more redistribution: Highlight the injustice of tax cuts for the rich, but press for more expenditures for low-income people.
The second study, by Faricy alone, examines how exactly the partisan politics of the tax code play out. Faricy, who is an assistant professor of political science and public policy at the Maxwell School of Citizenship and Public Affairs at Syracuse University, has just written a new book, “Welfare for the Wealthy,” examining how the policies of different parties affect inequality. In the paper on tax policy, he examines tax credits (overwhelmingly benefitting the poor) and tax deductions (overwhelmingly benefitting the rich) and looks at how the partisan control of the federal government shifts these benefits.
He finds, “The results of the analysis show that an increase in Democratic power at the federal level produces an immediate decrease in the annual level of total tax deductions that disproportionately benefit the rich, and an increase of federal tax credits, which help the working class.” The study finds that, “A switch to a Democratic president produces an immediate increase of over $83 million in the level of tax credits. This is a substantial increase of over 20% of the average yearly value of total tax credits during this study.” Faricy notes that, “Republicans increase tax deductions that target government money to the wealthy while being able to claim that they are providing middle-class tax relief.”
In previous pieces, I’ve examined the evidence that Democrats boost the incomes of working-class and middle-class Americans more than Republicans and also do a far better job of ensuring equitable growth across racial groups. I’ve also explored reasons for this, and particularly reasons that pundits struggle to see these effects. First, Democrats preside over lower unemployment rates and a stronger economy, which strengthens workers’ bargaining power. Second, market conditioning (like regulation) shapes the income distribution. Third, Democrats pursue a more active fiscal and monetary policy, whilst Republicans are more worried about higher inflation.
