How the government hinders the American Dream of upward mobility

With a budget that encourages consumption rather than savings, the gap between the American Dream and reality will only widen, some at the Tax Policy Center fear. One solution: Rethink those tax subsidies that too often hinder mobility in the name of enhancing it.

Upward mobility has been a foundation of America’s self-image since the 18^th century. If you work hard enough, nothing can stop you from getting ahead. That, at least in the minds of many Americans, is what distinguishes us from much of the rest of the world.

Yet, according to my always-provocative Tax Policy Center colleague Gene Steuerle, our tax and spending priorities not only fail to promote mobility for those who are starting at the bottom, but they often actively discourage the hard work and savings that help us climb the socio-economic ladder.

Oh, the federal budget is loaded with subsidies that encourage work and savings. But they are almost always aimed at improving the lot of middle- and upper-income households, not those who most need a leg up.

In testimony last week to the Senate Finance Committee, Gene estimated that of the nearly $750 billion in mobility-enhancing tax and spending programs in 2006, $540 billion–or nearly three-quarters– went to higher income households. Those with low-incomes received only about 2 percent of the benefit of subsidies for home ownership and almost none of the benefit of employer-related work subsidies or incentives for savings and investment.

Some of these programs not only fail to help poor and lower middle-class households, they actively hurt them. For instance, if home ownership is a key to upward mobility (an arguable proposition, but one many believe), we need to acknowledge that subsidies such as the mortgage interest deduction inflate home prices and make it harder, not easier, for poor families to buy.

Worse than that, Gene argues, once low-income households reach poverty level, government policy discourages work.  True, social welfare programs provide a valuable safety net for the very poor. For instance, the Earned Income Tax Credit and the Child Tax Credit are important income supports for low-income families.

But because these safety net programs phase out as incomes rise, some people face marginal tax rates as high as 80 percent for getting a better job or even a raise.  A new Urban Institute calculator shows how this works.

With a budget that encourages consumption rather than work and savings, the gap between the American Dream of unfettered mobility and the reality will only widen, Gene fears. His solution: Rethink those tax subsidies and spending programs that too often hinder mobility, paradoxically in the name of enhancing it.

This debate over mobility is a key subtext in the presidential race between Mitt Romney and President Obama. Each happily talks about the importance of the American Dream and upward mobility. Yet, neither seems willing to tackle the issues that Gene is raising.