Does the solution to widening economic inequality lie in a wealth tax? We speak to Emmanuel Saez, an adviser to Elizabeth Warren who helped design the “Ultra-Millionaire Tax” plan.Half-hour podcast.
A lot of left-ish proposals these days, including high marginal tax rates at high incomes and bans on share buybacks, are about increasing the cost to firms of making payouts to rich shareholders, thereby reducing the opportunity cost of other uses of the money. Some of these proposals I think are solid. Some I think half-baked. [1] But the basic logic behind the proposals is missed I think by a lot of smart commentators.Interfluidity
- Rep. Alexandria Ocasio-Cortez slammed former Wisconsin Gov. Scott Walker's simplification of her proposal to hike taxes on the super-rich in a tweet on Tuesday.
- Walker said he told a group of fifth graders that the policy amounted to their grandmother taking 70% of their $10 pocketmoney.
- In a viral takedown, Ocasio-Cortez pointed out that the proposed marginal tax rate increase would only apply to the wealthiest Americans.
It has been long argued that American income inequality was, in the past 40 years or so, exceptionally high compared to other OECD countries. The latest results available by Luxembourg Income Study that harmonizes income concepts across countries show inequality in disposable (per capita) income in the US to be 41 Gini points, that is, higher than in any other similarly rich country (Germany’s Gini is 32, British 35, Italian 35, Dutch 28). So, this part is not controversial.Global Inequality
What is more controversial is technical (as opposed to substantive) explanation for this “exceptionalism”. Some people have argued that US market income inequality (that is, inequality before government redistribution through social transfers and direct taxes) is not much higher than elsewhere and that the entire explanation has to do with an insufficiently redistributive state. In simple terms, the argument is that the market generates same inequality in the US and Sweden, but Sweden redistributes much more though pensions, unemployment benefits, social assistance etc., and also taxes the rich more, so in the end disposable (after transfers and taxes) income inequality in Sweden is less than in the United States.
Janet Gornick, Nathaniel Johnson and I have recently looked at this more carefully. Without going through all explanations (which can be found in the paper here), we conclude that this is not entirely true: US market income inequality is generally greater than in other rich countries and the American state redistributes less. So, we argue, both the underlying (market) inequality is high and redistribution is relatively weak.
But one can go further than that, and ask the following question: what part of redistribution is “weak”: is it that US transfers are small and not sufficiently pro-poor, or is it that US direct taxes are not sufficiently progressive?
Now, I look at that issue in the following way....
MICHAEL ROBERTS: I think the IMF, and that clip shows it, is worried that the huge increase in inequality of income and wealth in many countries, like the US and the UK, over the last 20 or 30 years is reaching such extreme levels that there is serious danger of social and political unrest. The great status quo of globalization and neoliberal policies and international activity in the direction of big business is being threatened by this high inequality. Their economists have now started to switch round and have found evidence to show that it doesn't really make a lot of difference to growth if big corporations and CEOs at the top of big companies who are earning fat salaries are taxed more in order to redistribute income effectively to those people who need it more and can be more productive.TRNN
In fact, their evidence shows that a higher rate of marginal tax has little or no effect on growth, and you could raise it from the levels which, Donald Trump's talking about knocking it down to God knows where, 15% or lower. Well, the marginal rate according to the IMF economists in their latest report could be as high as 60% or 70% and it would make little difference to growth, but it will make a significant difference to improving the redistribution of income....
Two recently posted papers by Brookings colleagues purport to show that “even a large increase in the top marginal rate would barely reduce inequality.”[1] This conclusion, based on one commonly used measure of inequality, is an incomplete and misleading answer to the question posed: would a stand-alone increase in the top income tax bracket materially reduce inequality? More importantly, it is the wrong question to pose, as a stand-alone increase in the top bracket rate would be bad tax policy that would exacerbate tax avoidance incentives. Sensible tax policy would package that change with at least one other tax modification, and such a package would have an even more striking effect on income inequality.…Brookings
Despite the growing focus on inequality in recent years, the 63% of Americans who say that money and wealth should be more evenly distributed among a larger percentage of the people is almost the same as the 60% who said this in 1984.
Americans' agreement that money and wealth need to be more evenly distributed reached a high point of 68% in April 2008, in the last year of the George W. Bush administration, and just before the full effects of the Great Recession began to take hold. Americans became slightly less likely to agree with the idea later that year and in surveys conducted in 2009, 2011 and 2013. This year's increase to 63% is close to the average of 62% agreement across the 13 times Gallup has asked the question since 1984. The latest data are from Gallup's April 9-12 Economy and Personal Finance survey.
Americans' views on how money and wealth should be distributed in the country are strongly correlated with their partisanship and ideology. Agreement ranges from 86% among Democrats and 85% among liberals, down to 34% and 42% among Republicans and conservatives, respectively.
Barack Obama has released the details of a fairly radical proposal to increase tax progressivity which he will make in his state of the union address.
The political impact will dwarf that of Chris Van Hollen’s proposal (which I am sad to say, has been quite dwarfish already). I am very enthusiastic about this. Even Romney is trying to sound populist. I am sure that politicians must have convincing evidence of a populist mood from polls and focus groups even aside from the public polls which, as always, show strong support for soaking the rich. I don’t see how Republicans can win this debate or even avoid debating with each other over whether Obama is a socialist class warrior or not a true economic populist like Republicans.
Matt Yglesias has an excellent (as usual) explainer at Vox. Basically the proposal is to increase the capital gains tax, close tax loopholes used by the rich, tax borrowing by huge banks and then use the proceeds to make permanent and expand various tax breaks for the non rich.Looks like populism is in.
What’s so interesting about Charité, Fisman, and Kuziemko’s paper is that it indicates that the general public’s preferences for redistribution might be different from what is assumed in the classic optimal taxation research. Their research isn’t the first to point this out, but it provides more proof that the average person might not be a strict utilitarian. This in turn means that the classical economic model that undermines a fair bit of the conversation about the proper level of progressive taxation might be based on some flawed assumptions. The importance of that fact shouldn’t be lost on economists and policymakers.Washington Center for Equitable Growth
To reiterate: when two sets of countries have the same market income inequality, but one set has much lower disposable income inequality, that's a good indication that simple changes in distributive institutions could do wonders for the more unequal country. When it comes to the US and the Nordics (which Winship notes are doing the best in this regard), adopting tax and transfer institutions that are similar in form to what the Nordics have should significantly improve the standard of living of those at the middle and especially those at the bottom. The further fact that economies in the Nordic countries grow at about the same rate as the US economy throws even more fuel on that fire because it indicates that, at least when they do it, there is no obvious efficiency/equality trade off involved.
The concern about inequality has very little to do with the market distribution itself (the market is, after all, just a creature of policy, a government program like any other). Rather, the concern is that high and rising inequality signals that we are throwing away opportunities to relieve the want and humiliation of the bottom (and to a lesser extent, the middle), and are opting instead to shovel more and more of the national income to the rich for no good reason.Demos Policy Shop
Pope Francis urges governments to redistribute wealth to the poor — maybe even half of it (via Raw Story )President Obama has openly encouraged envy of the top one percent of income earners. Reducing the share received by the highest earners to provide revenue for larger transfers to the lowest earners has long been a main objective of his administration. We can all expect this theme to be trumpeted loudly by the mainstream press as the mid-term election approaches: Some of us can have more, the argument goes, if we force others to have less.
Support for the alleged social benefits of setting much higher marginal tax rates on the highest incomes has now been endorsed by the International Monetary Fund, based heavily on research by two French economists named Thomas Piketty and Emanuel Saez. The two worked together on the faculty at MIT, where the current research director of the IMF, Olivier Blanchard, was a professor. Like Piketty and Saez, he is also French. France has, for many years, implemented destructive policies of income redistribution....
Voters who will hear the Obama call for envy and redistribution should ask themselves and others: Would you prefer to live in an America where the market is dynamic and opportunity abounds, or in France, where unemployment is high and tax rates are crushing? Don’t you prefer opportunity to envy?
I fear the American left’s recent move to put income inequality reduction front and centre might be harmful rather than helpful. It may foster a conviction that the key to addressing America’s social, economic and political problems is to reduce the top 1 per cent’s share or the Gini coefficient. That could distract attention from more direct and effective efforts to address those problems.
Such efforts include fully universal health insurance; improvements in eligibility, duration and benefit level for various social-insurance and social-assistance programmes; wage insurance; early education; enhanced financial support for college; a minimum wage indexed to prices; an expanded earned-income tax credit indexed to average compensation; and monetary policy less tilted towards inflation avoidance.
Policy changes like these would go a long way towards improving economic security, enhancing opportunity (and mobility) and ensuring shared prosperity in the US. Inequality of political influence could be lessened via direct reforms, such as reversal of the Citizens United decision, introduction of a strong transparency rule and public funding for congressional election campaigns.Asymptosis
As put forward in capitalist theories of ‘natural’ distribution redistribution allocates income and wealth away from their most economically ‘productive’ uses, from their ‘natural’ homes. Economic dynamism may produce ‘winners’ and ‘losers’ but so what? Capitalist theory, a/k/a Western economics, is the science of Social Darwinism. If aggregated abundance— the ‘most’ that ‘a society’ can produce, is the goal and redistribution reduces this theoretical abundance through the inefficient allocation of economic resources then it is antithetical to the primary social goal of Western political economy.
However, implied in these redistribution schemes is that there exist social virtues other than producing ‘the most’ regardless of its distribution. The problem again is that once the premise is granted that capitalism produces / has produced Western abundance and that this abundance is the rationale for Western political economy then redistribution simply buggers ‘the system.’
Of course the whole package is nonsense—Western political economy was ‘founded’ by genocidal plutocrats whose fortunes derived from the expropriated labor of slaves and from the expropriated lands of indigenous peoples. Western industry has been wholly dependent on standing armies, on imperial foreign policies to ‘secure’ industrial resources and on the ability to force its costs in terms of social and environmental dysfunction onto others.
As far as theories of ‘natural’ distribution go, the only way any working person in the West ever got a paycheck was through free-riding on the unionists who got their heads kicked in by Pinkertons and through credible threats of socialist / communist revolution as was seen in the 1930s. The ‘pragmatic’ concessions of the New Deal such as social guarantees were to prevent wholesale revolution.
Without New Deal programs capitalist distribution is landing exactly where it is intended to land— in the coffers of the already wealthy. By different measures the capitalist U.S. has much less social mobility than the European nations that have retained social guarantees.
Liberal and progressive politicians and their constituents who support both the corporatist policies of capitalist democracy and programs of economic redistribution are more than simply theoretically muddled, they support the very political economy that creates the need for economic redistribution....
As the great linguist Charles Fillmore discovered in 1975, all words are cognitively defined relative to conceptual "frames" -- structures we all use to think all the time. Frames don't float in the air; they are neural circuits in our brains. Frames in politics are not neutral; they reflect an underlying value system. That means that language in politics is not neutral. Political words do not just pick out something in the world. They reflect value-based frames. If you successfully frame public discourse, you win the debate.
A common neuroscience estimate is that about 98 percent of thought is unconscious and automatic, carried out by the neural system. Daniel Kahneman has since brought frame-based unconscious thought into the public arena in what he has called "System 1 thinking." Since frames carry value-based inferences with them, successfully framing public discourse means getting the public to adopt your values, and hence winning over the public by unconscious brain change, not by open discussion of the values inherent in the frames and the values that undergird the frames....
The reason that those of us in the cognitive and brain sciences write so passionately about framing issues is that unconscious thought and framing are not generally understood -- especially in progressive circles. Most progressives who went to college studied what is called Enlightenment reason, a theory of reason coming from Descartes around 1650 -- and which was historically important in 1650. The Cartesian theory of how reason works has since been largely disproved in the cognitive and brain sciences.
The Cartesian theory assumes that all thought is conscious, that it is literal (that is, it fits the world directly and uses no frame-based or metaphorical thought), that reason uses a form of mathematical logic (not frame-based logic or metaphorical logic), and that words are neutral and fit the world directly. Many liberal economists have been trained in this mode of thought and assume that the language used in economic theory is neutral and just fits the world as it is. They are usually not trained in frame semantics, cognitive linguistics, and related fields. The same is often true of liberal journalists as well. Both often miss the fact that conservatives have successfully reframed economic terms to fit their values, and that the economic terms in public discourse no longer mean what they do in economics classes.
Part of what the Cartesian theory of reason misses is the real brain mechanism that allows the conservative communication theory to be effective. By framing language to fit conservative values and by getting their framing of the language to dominate public debate, conservatives change the public's brains by the following mechanism. When a frame circuit is activated in the brain, its synapses are strengthened. This means that the probability of future activation is raised and probability of the frame becoming permanent in the brain is raised. Whenever a word defined by that frame is used, the frame is activated and strengthened. When conservatives successfully reframe a word in public discourse, that word activates conservative frames and with those frames, the conservative value system on which the frames are based. When progressives naively use conservatively reframed words, they help the conservative cause by strengthening the conservative value system in the brains of the public.
Liberals, in adhering to the old Cartesian theory of reason, will not be aware of their own unconscious values, will take then for granted, and will think that all they have to do is state the facts and the public will be convinced rationally. The facts are crucial, but they need to framed in moral terms to make moral sense and a moral impact....
The word at issue is "redistribution." The subject matter is the flow of wealth in the society and what it should be. This is a fundamentally moral issue, and the major political framings reflect two different moral views of democracy itself....The Huffington Post
I distinguish Three Models of Value Creation, Redistribution and Economic Development, with the following characteristics:
1. Under conditions of proprietary capitalism
2. Under conditions of emerging peer production under the domination of financial capitalism
3. Under conditions of strong peer production under civic dominanceP2P Foundation's Blog
