Mind the Gap
The Senate debate over President Bush's tax plan has focused so far on the plan's short-term effects, like whether a reduction in the dividend tax will help the stock market. While economic stimulus is important, Congress and the president should also take up an issue with far more consequence for America's long-term growth and stability: economic inequality.

According to the Census Bureau, the bottom 40 percent of American families earned 18 percent of the national income in 1970, but by 1998 they earned only 14 percent — and that figure could fall to 10 percent before too long. On a global scale, too, inequality is a problem. Per capita gross domestic product in India in 2000 was only 7 percent of that of the United States, and for China the figure was 11 percent. Such a difference could increase the possibility of greater inequality within America.

The prospect of worsening inequality is truly frightening, but in the present political environment, there appears little that can be done. In fact, Washington can act now to help prevent inequality from worsening. Without making any changes in tax rates, it could reform the tax system so that it automatically prevents economic inequality from getting any worse.

The tax cut passed two years ago was fairly conventional. Tax rates and brackets were mostly indexed to the Consumer Price Index. President Bush's current tax plan proposes some minor adjustments in this plan that accelerate the tax reductions.

This basic framework for tax law doesn't make much sense. Instead, future tax brackets and rates should be contingent on the extent of future inequality. Tax law should be based on a principle that might be called inequality insurance: the taxes would be collected in such a way as to insure that the level of inequality, after taxes and transfers, does not exceed the levels present when the law was enacted. If such indexing were put in place today, the brackets and rates would adjust whenever inequality worsened beyond today's levels.…
http://www.nytimes.com/2003/05/15/opinion/15SHIL.html