Mark Thoma — Why income redistribution doesn't hurt growth

Thomas Piketty's book "Capital in the Twenty-First Century" documents the increase in inequality in recent decades, and it has rekindled an old debate about the effects of income redistribution on economic growth. Until recently, most economists believed there's a trade-off between equity and efficiency and that the redistribution of income would lower economic growth.

Several reasons account for this, such as the economic distortions that taxes imposed to redistribute income and wealth can cause. However, the main reason is that taking income away from the wealthy reduces the incentive to implement innovative ideas. In its most extreme form, where redistribution is used to ensure that everyone has the same income, why bother to work hard, or work at all?

But as the recent paper "Redistribution, Inequality, and Growth" by Jonathan D. Ostry, Andrew Berg, and Charalambos G. Tsangarides of the International Monetary Fund explains, there are also reasons to believe the redistribution of income can enhance economic growth in some cases....

Economics does not tell us what the distribution of income ought to be. That involves a value judgment, and individuals will differ on what is fair and equitable. But economics can tell us about the consequences of redistribution, and the best evidence we have suggests that modest redistribution, if anything, enhances growth.

CBS News Money Watch
Why income redistribution doesn't hurt growth
Mark Thoma | Professor of Economics, University of Oregon

Why inequality matters — it's a class thing.

This week at the Monkey Cage blog, Duke University political scientist Nicholas Carnes wrote a fascinating pair of posts arguing that, when it comes to America's political system, class matters -- even more than a lot of us thought. The posts are based on his recent book, White Collar Government: The Hidden Role of Class in Economic Policy Making. It's hardly news to American voters that our elected officials tend to be wealthy, to a wildly disproportionate degree. But the extent to which this is so is stunning.

Carnes points out that, although millionaires make up only 3 percent of the population, they "have a majority in the House of Representatives, a filibuster-proof super-majority in the Senate, a 5 to 4 majority on the Supreme Court and a man in the White House." At the same time, working class people -- whom he defines as "people with manual-labor and service-industry jobs" -- make up more than half of the population, yet people from working class backgrounds have never held more than 2 percent of the seats in Congress.

You might suspect that a legislator's class background would not independently affect the policies she supports -- that, once you control for other factors like political party and constituents' views, the impact of class would disappear. But this is not the case; as Carnes writes, "even after controlling for these factors using a variety of statistical techniques, there are still significant differences between politicians from different classes."

Inequality Matters
Congress is a millionaires' club. Why that matters, and what we can do about it.
Kathleen Geier
(h/t Mark Thoma at Economist's View)

Should Americans Be Required To Save?

Commentary by Roger Erickson

Depends on the context. For example.

Should Americans be required to save ... for corporate welfare? *

Right concept? Wrong application of logic?

Or would Albert Camus approve of this absurd question, posed for the right reason?

Corporations know know how to invest your fiat BETTER than you do? Why not let more citizens decide, on their own, which corporations to invest THEIR FIAT in ... privately? If we have income disparity and wealth disparity, don't we have freedom disparity?

* Corporate Welfare

Thomas L. Hungerford on rising inequality due to tax policy

Abstract:  
This paper examines changes in after-tax income inequality among tax filers between 1991 and 2006. In particular, how changes in wages, capital income, and tax policy contribute to changes in income inequality is investigated. To examine the role of these three possible contributors to the increase in income inequality, the Gini coefficient is decomposed by income source using the method developed by Lerman and Yitzhaki (1985). The Gini coefficient of after-tax income increased by 15 percent (0.071 points) between 1991 and 2006. By far, the largest contributor to this increase was changes in income from capital gains and dividends. Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. Similar results are obtained with other inequality measures.
SSRN

Changes in Income Inequality Among U.S. Tax Filers between 1991 and 2006: The Role of Wages, Capital Income, and Taxes
Thomas L. Hungerford — January 23, 2013