Can tax policy aid income inequality?

One of the most effective ways to disperse wealth, for better or for worse, is through manipulation of the tax code.
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Can tax policy aid income inequality?

One of the most effective ways to disperse wealth, for better or for worse, is through manipulation of the tax code.

One example is the Pennsylvania Educational Improvement Tax Credit (EITC) program. This effort authorizes tax credits for businesses that make contributions to educational improvement or scholarship organization, and these funds can then be distributed by a school for tuition assistance, often to the less affluent.

Stuart Hoffman, chief economist with the PNC Financial Services Group, particularly likes this particular method of income redistribution because it puts education within the reach of less-affluent families. He calls higher education the best long-term weapon against poverty. Other efforts to use the tax code to help the poor are, at best, short-term, he says.

“In general, tax breaks are not the best fix for our income inequality problems,” says Hoffman. “We already have a graduated tax system and most tax breaks are only temporary in nature. Education and training are the real keys for people to increase their incomes.”

More attention to student training in skilled trades, as opposed to a liberal arts education, is another worthy way to increase a person’s income, he says.

 

Favorable training

 

 

Darlene Robbins, president of the Northeast Pennsylvania Manufacturers and Employers Association, is a champion of on-the-job education enabled by tax credits for employers. She recalls the Comprehensive Employment and Training Act (CETA) of the late 1970s, and how this effort has evolved into modern Workforce Investment Board programs that help with training and create partnerships between government and the private sector.

Robbins is a big fan of federal on-the-job training assistance, which the employer controls and receives up to 50 percent of entry-level wage reimbursement for up to 180 days. This plan results in effective training and allows both employer and worker to discover if there is a real “fit” between them.

“This is a partnership made possible by tax credits that achieves true job placement, which is the ultimate goal,” says Robbins. “It should be expanded past entry-level, because it also helps end entitlement attitudes created by conventional social programs.”

Tax breaks require working within a defined system but can’t effectively level a playing field, according to Susan Shaffer, a workforce consultant based in Covington Township.

She believes that taxing the rich and simply giving the money to the poor solves nothing. Instead, tax dollars are best used to close skill gaps that hold back low-income workers. “One of the best ways to accomplish this is to allow entry-level people already working to access retraining funds,” says Shaffer. “This is our best chance to ‘up-skill’ workers for promotion, and then once again open the entry-level jobs. Unless these entry-level jobs open up, no one can move in, and then up.”

Shaffer adds that there are no immediate fixes to the problem of low-wage employment. All of the effective solutions she has seen are long-term in nature, and must also provide soft-skill support and life-skill training. “We have to offer help with drinking and drug use, because these are all-too-common coping mechanisms people use that sabotage their workplace success,” says Shaffer.

 

 

Government interference

 

 

Tax breaks are really a form of government interference in free markets, according to Tim Kearney, Ph.D., chairman of the business department at Misericordia University. While he acknowledges a program like EITC can help educate workers, complicated tax codes ultimately sink an economy. Dr. Kearney therefore suggests fixed and permanent tax rates that standardize the economic rules of the road. This will increase labor force participation through development of a stronger economy. “It’s best to have a level playing field where the special interests have been removed,” says Dr. Kearney.

Jeffrey Alves, Ph.D., dean of the Sidhu School of Business at Wilkes University agrees that targeted tax breaks actually create market interference. Such capricious interference creates uncertainty, which can damage the confidence to expand.

“Tax breaks to redistribute wealth just kick the can down road. They are sure to create future trouble,” says Dr. Alves. “They are not a solution.”

 

 

Strategic planning

 

 

Kim Hawk, past president of the Northeast Pennsylvania Society of Human Resource Management, notes that tax credits for new employees can only be used by an employer if they have cash on hand to first cover their payroll expenses. This often is not the case for small business.

However, Hawk emphasizes that a business’s strategic plan usually makes no mention of tax codes. “Tax code changes are tied more to capital expenditures than strategic employment planning,” says Hawk. “Tax breaks are usually short-term, and can vanish at any moment. That’s why lowering taxation usually does not play a role in wages and hiring.”

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