Bill Gates on income inequality, plugging a tax loophole, and a history lesson on immigration

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WASHINGTON, D.C. - Inequality of wealth and income in America is wider than at any point since the Roaring Twenties.  Despite that, it wasn’t a topic of much debate in the election this year. One person who has paid close attention – surprisingly? not surprisingly? – is Bill Gates.  It is quite something to see the world’s second richest man confront this topic in an intellectually honest way.

That is exactly what Gates has done on his blog in a review of Thomas Piketty’s book, “Capital in the 21st Century.”  Piketty has supplied much of the data we have about economic inequality in America.  His book argues that unless the large economies of the West radically change their economic policies, especially tax policies, inequality will increase, become institutionalized and inherited wealth will snuff out real upward mobility.

Not surprisingly, Gates does not believe all wealth is created – or deployed – equally:

Imagine three types of wealthy people. One guy is putting his capital into building his business. Then there’s a woman who’s giving most of her wealth to charity. A third person is mostly consuming, spending a lot of money on things like a yacht and plane. While it’s true that the wealth of all three people is contributing to inequality, I would argue that the first two are delivering more value to society than the third.

Gates goes on to argue that the optimal way to combat inequality is not through higher income taxes, but through a progressive consumption tax. It’s an interesting idea and Gates argument is very clear. It is an interesting essay.

Time to plug this tax loophole?

The single greatest affront to the principal of progressive taxation is a practice in the U.S. called the carried-interest rule that essentially allows managers of hedge funds and private equity funds to treat income as capital gains. Writing in The New York Times, financial columnist James Stewart suggests that exterminating this egregious inequity would be an excellent opportunity for the President Obama and Congress to commit a little bipartisanship.

Stewart writes:

When I’ve pressed the issue with hedge fund managers, I’ve found that they privately admit that the favorable tax treatment isn’t justified by any policy benefits and isn’t fair, even while publicly defending it and lobbying to preserve it. One of the few who has come out publicly for reform is Fred Wilson, a partner at the venture capital partnership Union Square Ventures. “It’s time for asset managers to start paying their fair share of taxes,” he wrote on his blog, AVC, in 2010. “We are among the most highly compensated people in the world. And we’ve been getting a huge tax break for years. It’s not right.”

Greg Mankiw, the Harvard professor and economist who advised the Republican presidential candidate Mitt Romney, told me flatly this week, “Much carried interest income is really compensation for labor services and should be treated as such.”

Immigration amnesty is nothing new

Finally, a little history pertaining to one of our most heated issues – immigration:

Republicans are going berserk at the prospect that Obama will take “unilateral action” to give illegal immigrants “amnesty.”

The Associated Press points out that is exactly what both Ronald Reagan and George H.W. Bush did in the 1980s, without controversy.

In 1986, Congress and Reagan enacted a sweeping overhaul that gave legal status to up to 3 million immigrants without authorization to be in the country, if they had come to the U.S. before 1982. Spouses and children who could not meet that test did not qualify, which incited protests that the new law was breaking up families.

Early efforts in Congress to amend the law to cover family members failed. In 1987, Reagan's Immigration and Naturalization Service commissioner announced that minor children of parents granted amnesty by the law would get protection from deportation.

Spouses and children of couples in which one parent qualified for amnesty but the other did not remained subject to deportation, leading to efforts to amend the 1986 law.

In a parallel to today, the Senate acted in 1989 to broaden legal status to families but the House never took up the bill. Through the INS, Bush advanced a new "family fairness" policy that put in place the Senate measure. Congress passed the policy into law by the end of the year as part of broader immigration legislation.

So all the Congress has to do to prevent the president from imposing his unilateral will is legislate. Stranger things have happened.

[Also by Dick Meyer: Immigration ends the end of gridlock]

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