Governments can raise more revenue with consumption taxes because they aren’t as distorting as taxes on capital and income. You can fund higher levels of social/welfare spending with consumption taxes without limiting economic growth as much.

This is a worthy consideration since those countries in the chart are unlikely to have the amount of multi-layer taxes from Federal and state like the U.S.

Another thing that gets ignored in the inequality debate is the role of monetary inflation and political corruption. Living in Miami, maybe I have a better view of what causes inequality because I’m so close to Latin America, but it seems obvious that these two factors are correlated with inequality. There is academic research to back that up:

http://econpapers.repec.org/paper/cprceprdp/3470.htm

There are others as well, but I don’t have time to dig them up. There is also a correlation between gini coefficient and inequality.

When I speak of inflation, I use the classic definition of an increase in money supply relative to demand. If one thinks about how inflation of money and credit is distributed, I think it becomes clear that inflation of the money supply is a signficant factor in producing inequality. When new money is created by the Fed or the banking system, it is the wealthy that benefit first from this new money. As it circulates through the system, the price of goods and/or assets rise. By the time it reaches the poor the purchasing power of the new money has diminished.

Over the last two decades we have seen three asset bubbles. Ask yourself who benefitted most from the internet bubble, the housing bubble and the commodity bubble. The wealthy who funded the venture capital firms who in turn funded the internet companies were obvious beneficiaries of the internet bubble. Poorer people were stuck buying the inflated stocks after they were floated on the market. In the housing bubble, the wealthy or relatively wealthy, already owned real estate which rose in price. In the commodity bubble, the poor got killed by high gasoline and food prices which had a relatively minor impact on the rich.

If we are to reduce inequality and fund higher levels of social spending we cannot do it without a higher growth rate. Merely adding new taxes, regardless of their efficiency, is not the answer. The answer is to find a balance between consumption taxes and capital and income taxes. Any real answer will also have to address the serial inflations of the Federal Reserve. While a gold standard has many drawbacks, it may be the only way to restrain the inflationary tendencies of a central bank. At a minimum, the Fed should have its mandate reduced to maintaining the purchasing power of the dollar and leave growth management to fiscal policy.