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Thoughts on Income Inequality

March 26, 2012 by Robert E. Litan

Income inequality is near an all-time high, and is sure to be among the hot topics of the coming Presidential campaign and beyond. It will not be a constructive debate for the country — or in the interest of the Republican party in particular — for the debate to be waged on the tired, familiar ground of whether the income tax system ought to be used to “cure” the problem by returning the top marginal income rate to the pre-Bush years (actually, if that is done and the taxes under the health care law go into effect, the top marginal rate will be higher than before 2000). Putting aside politics (I know that is hard to do), the right thing for the country is actually to lower the top marginal rate, while reducing deductions, as the Bowles-Simpson budget compromise proposed to do. Lower marginal rates will reduce penalties on work and entrepreneurship and thus will enlarge the size of the economic pie for everyone (though by how much I admit is in dispute). The only certain way to ensure the slices of that pie are handed out more evenly is to do much more to fix the huge educational inequities in this country — which contribute to the alarming 30% dropout rate. The weight of the empirical evidence shows that throwing more money at public schools will not close the educational gap without first fixing the underlying dysfunctional incentives that discourage the hiring and retention of good teachers and the weeding out of poor ones (incentives that exist elsewhere in our economy). With the public not embracing vouchers, the only alternative left is to push the states much harder on permitting and adequately funding charter schools. This is our best chance of providing some competition in the public school marketplace. Hopefully, some of these schools — and traditional public schools as well — will also begin embracing technological advances like those being pioneered by the Khan Academy, which I believe to be most important disruptive force in education seen in this country in decades. If you missed the 60 minutes segment on the Academy in early March, check it out here. Teachers, principals, superintendents, and school boards should take notice. Fixing our public schools — especially for children born into poverty, with single parents, and with parents of low income — is the most important civil rights and economic issue of our time. It is a challenge that should transcend politics and unite our country. Achieving 4% growth requires it. We cannot expect to permanently increase growth unless we do all we can to ensure that everyone is capable of contributing to a growing, vibrant economy. It’s not only a matter of fairness, but of common sense.


Author

Robert E. Litan

2012 Economic Growth Fellow

Robert E. Litan is Director of Research of B-Gov, a subsidiary of Bloomberg LLP. Previously Litan was Vice President for Research and Policy at the Kauffman Foundation and a Senior Fellow in Economic Studies at the Brookings Institution. He has authored or co-authored more than 20 books, edited another 14, and authored or co-authored more than 200 articles in journals, magazines, and newspapers. He has served in several capacities in the federal government. From 1995 to 1996, he was associate director of the Office of Management and Budget, and from 1993 to 1995 he was Deputy Assistant Attorney General. He received his B.S. in economics (summa cum laude) from the Wharton School of Finance at the University of Pennsylvania; his J.D. from Yale Law School; and both his M. Phil. and Ph.D. in economics from Yale University.

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