1 thought on “Links: July 2009”

1. Prof. Kenworthy,

   I’m trying to understand the connection, if any, between these two facts. Can you help me? From Worthwhile Canadian Initiative:

   I’m having a really rough time understanding this problem. You suggest taxing the highest incomes, but here’s Lane Kenworthy:

   “As the following chart shows, inequality reduction is achieved not through taxation but with government transfers (and services)”

   He does like these taxes for the US:

   “Two other progressive tax reforms are worth pursuing, though they would affect some in the bottom 95%. One is to reduce or end the homeownership subsidy. More than 80% of the $160 billion in foregone revenues from the deduction for mortgage interest and property tax payments goes to households in the top income quintile. The other is to introduce a modest tax on financial transactions.”

   Here’s his final point, where he does talk about taxes again:

   “Moderate or high levels of tax revenue can’t come solely from higher rates or new taxes on the rich; the math simply doesn’t work. To significantly increase spending on transfers and/or services, President Obama and/or his successors will need to increase taxes on the middle class. One way to do this would be via a federal consumption tax, such as a value-added tax (VAT). We have state and local consumption (sales) taxes, but we raise less money from consumption taxes than any other rich country. Consumption taxes are regressive, and for that reason they’re often dismissed by the American left. But they can be tweaked to limit the degree of regressivity. And if the money is put to progressive use, the benefits may outweigh this drawback.”

   But then how do we explain this, from Donald Marron:

   “In a series of posts (most recent here), I’ve documented that Americans are getting an increasing portion of their income from the government.

   BEA released new data on incomes a couple weeks ago, including revisions back to 1995. These data reinforce the story I’ve described in my previous posts:

   * Transfers accounted for 17.3% of personal income in June. That’s the second highest in history, topped only by the 18.2% recorded in May, when transfers were boosted by one-time payments from this year’s stimulus act:”

   In other words, since 1960, govt transfers as a portion of personal income has gone up from 6% to 18%. And yet we have rising inequality!?

   Now, I’ve asked Krugman and De Long about this, and gotten no answer. Here’s a possibility from David Hilfiker:

   “And that leads to the second major straightforward cause of inequality in the country: the relatively low levels of government wealth transfer from the rich to the poor. By “wealth transfer” I mean both the effects of government taxation and the effects of government programs. There are obvious transfers of wealth like food stamps or welfare payments, but there are other more important sources of this wealth transfer. For instance, universal health care benefits everyone about equally, so, in essence, government-funded health care transfers wealth from the rich to the poor. Public education, social security, Medicaid, and Medicare are other examples.

   Examining the statistics, one finds that it is this differential in wealth transfer that actually accounts for most of the difference in inequality between the United States and European countries. If you use the same international method to calculate poverty rates for the United States, Canada and Western Europe and if you calculate those rates before any government transfer of wealth, it turns out that the US poverty rate is among the lowest. But if you calculate that poverty rate after government transfers, the US poverty rate is by far the highest at 18% (the United Kingdom is 13% but all other European countries are 8% or under). So, the primary reason that other developed societies are more equal than American society is that, in essence, they take money from the rich and give it to the poor.

   In other words, while some of the causes of American inequality are complex and would be fairly complicated to do anything about, two of the most important causes—taxes and government programs—are not complex at all and would theoretically be easy to correct.”

   And here’s what’s funny: I’m a Milton Friedman Democrat, and he loves Naomi Klein’s book, which, as you can guess, I don’t. But I agree with him! I agree with him about Inequality in general. He also likes the EITC. I prefer a Guaranteed Income. As Milton Friedman said, it has the benefit of focusing money on the poorest in our society. The only thing that I disagree with him about, and, here I disagree with you as well, is the effectiveness of tax increases on the top earners for Lane Kenworthy’s reasons:

   I wonder where you come down on this issue?

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