The following is a letter to Luigi Zingales and Bethany McLean after listening to Season 2 Episode 76 of their podcast CAPITALISN’T.
Dear Bethany, dear Luigi,
Today, I listened to season 2 episode 76 on Poverty And Inequality In America: Part 1, with Sen. Phil Gramm. I appreciated the range of critical perspectives on how income and wealth (in-)equality is measured and reported. One particular aspect made me very curious and I would love to understand what economists and the academic literature has to say about this issue. As you were speaking about the US, I will only take the US into account, however, this argument might be valid in other countries as well.
Towards the end of the episode, you come across a recurring topic in Capitalisn’t, the welfare spent on low wage workers. The prime example for this is Walmart. This is often represented as big corporations using the welfare system to have their operations subsidized by tax payers.
I want to make three assumptions in order to make this argument:
- Walmart’s net profit margin isn’t extraordinarily large. Therefore, the argument that Walmart’s shareholders are pocketing taxpayers money seems rather weak. So for the sake of the argument, profit margins shall be held constant and not have a significant effect (macrotrends.net).
- High-income taxpayers pay a larger proportion of taxes than low-income taxpayers. With current welfare programs, this leads to a redistribution of income from high-income taxpayers to low-income taxpayers (taxfoundation.org).
- As discussed in the episode, I do acknowledge that income is about more than just having enough money to buy food and a low income can have many negative social, professional, and psychological consequences.
The most popular argument goes: The middle class and high-income taxpayers pay the highest amount of taxes, which is transferred (in parts) to low-income workers, who benefit from food-stamps or medicaid. Indirectly, companies can benefit by underpaying their employees.
But what if that is not the full picture? We know, that employees are a major cost factor for today’s companies, especially in developed countries. Considering Walmart’s only average returns, we have to assume that they would have to raise prices in order to make up for higher wages – if welfare programs didn’t support their employees anymore. Higher prices at Walmart would disproportionately impact low-income and other households, who buy their essentials at Walmart.
These other households are an important group and could be considered lower and upper middle-class. Despite the fact that they do not work at Walmart or might not be shareholders at Walmart, they still benefit from lower prices. The low-income households might even benefit twice. They get a job, get the welfare on top of their salaries, and experience lower prices in this retail segment.
What this does in effect is to take taxes from high-income taxpayers and redistributes that onto quite a broad part of the population, benefiting the lowest-income taxpayers multiple times while still benefiting even the middle class.
So while there are clearly problems with how this distribution is done in practice, creating a low-income and welfare dependent group, the empirical effects of this tax and welfare setup is by far not as bad as it sounds and looks on the surface. While clearly being a policy that supports consumerism, despite all its flaws, it has the potential to raise the living standards of large parts of our society, especially the ones that could benefit from it the most.
I would be curious to hear whether you would agree.
From London,
David