The release of the video in which Governor Romney denigrated the 47 percent of households who don’t pay income taxes has set in motion a silly debate about who pays taxes and who doesn’t. This debate is a distraction from the real issues because paying taxes and receiving government benefits like Social Security and Medicare are less important in terms of income distribution than the way the government structures the economy.

In the last three decades the economy has been restructured in ways that have led to a massive upward redistribution of income. Serious public debate should be focused on these mechanisms.

The Impact of Trade Policy

To start with the most obvious, trade policy has been deliberately structured to place U.S. manufacturing workers in direct competition with low paid workers in the developing world. The predicted and actual outcome of this policy has been the elimination of millions of manufacturing jobs and wage depression of a large segment of the workforce as displaced manufacturing workers are forced to compete for jobs in retail, restaurants and other sectors of the economy.

The effect of this trade policy is further enhanced by the decision to have an overvalued dollar (aka a "strong dollar") that dates from when Robert Rubin became Treasury Secretary in 1996. An overvalued dollar hurts those in sectors that are exposed to trade, while benefiting professionals like doctors and lawyers who rely on professional restrictions to largely insulate themselves from international competition.

About Those Subsidies

While trade is a huge deal, it is far from the only story. The government gives $60 billion a year in subsidies to the large Wall Street banks in the form of "too big to fail" insurance. This means that the banks can borrow at lower interest rates because creditors assume that the government will bail them out if the bank gets into trouble.

Patent monopolies on prescription drugs transfer close to $270 billion a year from patients to the drug industry. Almost all drugs would sell for $5-$10 per prescription without this form of protection from the government.

Don’t Forget About Interest Rates

The Federal Reserve Board is also an incredibly important force in redistributing income upward. As a matter of policy it will raise interest rates to slow the economy and throw people out of work, if it believes that inflation might rise above its 2.0 percent target. Higher unemployment puts downward pressure on the wages of workers in general. By contrast, inflation poses a threat to banks and other lenders, hence the Fed’s obsession with ensuring that the inflation rate remains very low.

The structure and enforcement of laws around union organizing and strikes can also be very important in determining the distribution of income. While Canada is very similar to the United States in many respects, more than 30 percent of its workforce is represented by a union. This compares to just 10 percent in the United States. The main difference is that Canada’s labor laws make it much easier to organize a union. Since unionized workers tend to get higher wages, the decline in unionization since the 70s has likely been an important factor in depressing wages.

The New U.S. Economy

These policies and others that have been put in place over the last three decades lie behind the enormous upward redistribution of wealth that has taken place over this period. Their impact dwarfs the impact of the tax increases on the wealthy that are being proposed by President Obama.

A presidential campaign is a great time to have a national debate over these policies. Unfortunately, we seem destined to have a silly debate over whether poor people should be paying more in taxes.

Governor Romney may have badly damaged his campaign with his videotaped remarks. Unfortunately the rest of us will be the big losers if his comments preempt a serious discussion of the upward redistribution we have seen over the last three decades.

– Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC. He has a blog, "Beat the Press []," where he discusses the media’s coverage of economic issues.

— This article was originally published on September 19, 2012 by Yahoo! Finance.


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