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Wednesday, December 7, 2011

Some Thoughts on Income Inequality and Redistribution -- Not class conflict but class cooperation

The Welfare State.  In Monday’s Washington Post page A19 Robert Samuelson compares our welfare state to Europe’s and asks where the balance is for both places.  He goes on to say: “The paradox is that the welfare state, designed to improve security and dampen social conflict, now looms as an engine for insecurity, conflict and disappointments.”

Productivity to Fund Entitlements.  I’ve been thinking about our aging population and its so-called threat to Social Security and Medicare.  Everyone writes about the incredible growth in productivity over the last several decades and the fact that less people are working per retiree, but they are producing far more per worker than 20 or 30 years ago.  No one seems to want to connect this greater wealth per worker with the greater need for funding for entitlements.   Logic suggests that the greater amount needed for entitlement programs should come from that greater wealth being created.  Considering how wages have flattened out since 1980, investors rather than workers are receiving the rewards from greater productivity.  Employment taxes, at least as currently structured, are not going to be enough.  It seems to me that the additional funding needed for entitlements for those who built the current industrial base should come from the wealth created by increased productivity, i.e., from returns to investors.  Yes, this is another way of saying tax the rich, but I hope it also says why this is the right thing to do.  

Why No Agreement in Congress?  The thing that continues to puzzle me is why the two parties have not been able to move even an inch toward progressivity.  It’s a Republican position that part of “Social Security reform” should involve introduction of some progressivity in employment taxes.  The Democrats say they put this on the table during at least the last failed super committee.  Why couldn’t they find some kind of agreement?  I suspect the barrier was Republican intransigence on the Bush tax cuts, but I haven’t seen anything conclusive. 

OECD on Income Inequality.  On Monday December 5, the OECD released a report on the rise in income inequality and this was reported in Tuesday’s Washington Post, page A22.  Similar figures have been around for a while, but when I tried one of them on a bond trader for the Bank of Scotland in after dinner chit chat on Thanksgiving, his response was: “That’s not true.”  He went on to tell me that he passed a house trailer recently and inside there was a flat screen TV!  You can see how these people are.  They aren’t really willing to work, but when they do get some money, they blow it on non-essentials.  When I asked him if he didn’t think the life of a person trying to support a family on $40,000 a year must be pretty grim, his response was: “He should do more.”  Thank god he didn’t say anything about baths.  I sliced and diced the OECD figures for myself and two of them stuck out.  The average after tax income for the bottom 20% in 2008 was $17,500.  Man, try and live on that.  The one that really got me was the average after tax income for the top 10%, $114,000.  When you realize that that average includes the top 1% making $1.3 million on average, even a lot of people in the top 10 % have to be way below $114,000 and the remaining 90% way below them.

Class Cooperation.  So much is being written about income inequality, class conflict and the nefarious 1% that I think only one more thing needs to be said.  When Obama et al propose raising taxes on the rich, this is not class conflict.  This is an effort to get class cooperation and strangely enough many really rich people agree.  They realize it's in their long term interest.

Tax Reform.  We do have a lot of work ahead to get revenue to match or exceed expenditures.  My choice would be raising marginal rates for higher incomes, making all income subject to those rates, cleaning up the deductions mess, and replacing the corporate income tax with a value added tax (VAT).  I haven’t looked at the literature for years on how and to whom corporate taxes are shifted, but certainly a substantial chunk is shifted to buyers in the form of higher prices, so it would seem to make little difference whether this tax was paid by corporations or by consumers.  The big advantage of the VAT is that it can be rebated when goods are exported.  This would make the US more competitive in export markets and would create jobs at home.

Taxes and the Unemployment Rate.  And finally, what I’d really like to do is tie the top marginal income tax rates to the unemployment rate -- the higher the unemployment rate, the higher the tax.  This looks like the opposite of the Keynesian model, but perhaps not if the revenue from the higher tax rates were earmarked for government job creation.  Conservatives tell us that all we have to do is cut taxes and the “job creators” will get to work creating jobs and solving the unemployment problem.  Well, they have low taxes now and they’re not doing it and they’re sitting on trillions of dollars.  Better the government tap that and put people to work.

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