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“Is Vast Inequality Necessary?”: Inequality Is Inevitable; The Vast Inequality Of America Today Isn’t

How rich do we need the rich to be?

That’s not an idle question. It is, arguably, what U.S. politics are substantively about. Liberals want to raise taxes on high incomes and use the proceeds to strengthen the social safety net; conservatives want to do the reverse, claiming that tax-the-rich policies hurt everyone by reducing the incentives to create wealth.

Now, recent experience has not been kind to the conservative position. President Obama pushed through a substantial rise in top tax rates, and his health care reform was the biggest expansion of the welfare state since L.B.J. Conservatives confidently predicted disaster, just as they did when Bill Clinton raised taxes on the top 1 percent. Instead, Mr. Obama has ended up presiding over the best job growth since the 1990s. Is there, however, a longer-term case in favor of vast inequality?

It won’t surprise you to hear that many members of the economic elite believe that there is. It also won’t surprise you to learn that I disagree, that I believe that the economy can flourish with much less concentration of income and wealth at the very top. But why do I believe that?

I find it helpful to think in terms of three stylized models of where extreme inequality might come from, with the real economy involving elements from all three.

First, we could have huge inequality because individuals vary hugely in their productivity: Some people are just capable of making a contribution hundreds or thousands of times greater than average. This is the view expressed in a widely quoted recent essay by the venture capitalist Paul Graham, and it’s popular in Silicon Valley — that is, among people who are paid hundreds or thousands of times as much as ordinary workers.

Second, we could have huge inequality based largely on luck. In the classic old movie “The Treasure of the Sierra Madre,” an old prospector explains that gold is worth so much — and those who find it become rich — thanks to the labor of all the people who went looking for gold but didn’t find it. Similarly, we might have an economy in which those who hit the jackpot aren’t necessarily any smarter or harder working than those who don’t, but just happen to be in the right place at the right time.

Third, we could have huge inequality based on power: executives at large corporations who get to set their own compensation, financial wheeler-dealers who get rich on inside information or by collecting undeserved fees from naïve investors.

As I said, the real economy contains elements of all three stories. It would be foolish to deny that some people are, in fact, a lot more productive than average. It would be equally foolish, however, to deny that great success in business (or, actually, anything else) has a strong element of luck — not just the luck of being the first to stumble on a highly profitable idea or strategy, but also the luck of being born to the right parents.

And power is surely a big factor, too. Reading someone like Mr. Graham, you might imagine that America’s wealthy are mainly entrepreneurs. In fact, the top 0.1 percent consists mainly of business executives, and while some of these executives may have made their fortunes by being associated with risky start-ups, most probably got where they are by climbing well-established corporate ladders. And the rise in incomes at the top largely reflects the soaring pay of top executives, not the rewards to innovation.

Don’t say that redistribution is inherently wrong. Even if high incomes perfectly reflected productivity, market outcomes aren’t the same as moral justification. And given the reality that wealth often reflects either luck or power, there’s a strong case to be made for collecting some of that wealth in taxes and using it to make society as a whole stronger, as long as it doesn’t destroy the incentive to keep creating more wealth.

And there’s no reason to believe that it would. Historically, America achieved its most rapid growth and technological progress ever during the 1950s and 1960s, despite much higher top tax rates and much lower inequality than it has today.

In today’s world, high-tax, low-inequality countries like Sweden are also both highly innovative and home to many business start-ups. This may in part be because a strong safety net encourages risk-taking: People may be willing to prospect for gold, even if a successful foray won’t make them quite as rich as before, if they know they won’t starve if they come up empty.

So coming back to my original question, no, the rich don’t have to be as rich as they are. Inequality is inevitable; the vast inequality of America today isn’t.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, January 15, 2016

January 18, 2016 Posted by | Economic Inequality, Tax Revenue, Taxes on the Wealthy | , , , , , , , , | Leave a comment

“Elections Have Consequences”: Don’t Let Anyone Tell You Otherwise

You have to be seriously geeky to get excited when the Internal Revenue Service releases a new batch of statistics. Well, I’m a big geek; like quite a few other people who work on policy issues, I was eagerly awaiting the I.R.S.’s tax tables for 2013, which were released last week.

And what these tables show is that elections really do have consequences.

You might think that this is obvious. But on the left, in particular, there are some people who, disappointed by the limits of what President Obama has accomplished, minimize the differences between the parties. Whoever the next president is, they assert — or at least, whoever it is if it’s not Bernie Sanders — things will remain pretty much the same, with the wealthy continuing to dominate the scene. And it’s true that if you were expecting Mr. Obama to preside over a complete transformation of America’s political and economic scene, what he’s actually achieved can seem like a big letdown.

But the truth is that Mr. Obama’s election in 2008 and re-election in 2012 had some real, quantifiable consequences. Which brings me to those I.R.S. tables.

For one of the important consequences of the 2012 election was that Mr. Obama was able to go through with a significant rise in taxes on high incomes. Partly this was achieved by allowing the upper end of the Bush tax cuts to expire; there were also new taxes on high incomes passed along with the Affordable Care Act, a.k.a. Obamacare.

If Mitt Romney had won, we can be sure that Republicans would have found a way to prevent these tax hikes. And we can now see what happened because he didn’t. According to the new tables, the average income tax rate for 99 percent of Americans barely changed from 2012 to 2013, but the tax rate for the top 1 percent rose by more than four percentage points. The tax rise was even bigger for very high incomes: 6.5 percentage points for the top 0.01 percent.

These numbers aren’t enough to give us a full picture of taxes at the top, which requires taking account of other taxes, especially taxes on corporate profits that indirectly affect the income of stockholders. But the available numbers are consistent with Congressional Budget Office projections of the effects of the 2013 tax increases — projections which said that the effective federal tax rate on the 1 percent would rise roughly back to its pre-Reagan level. No, really: for top incomes, Mr. Obama has effectively rolled back not just the Bush tax cuts but Ronald Reagan’s as well.

The point, of course, was not to punish the rich but to raise money for progressive priorities, and while the 2013 tax hike wasn’t gigantic, it was significant. Those higher rates on the 1 percent correspond to about $70 billion a year in revenue. This happens to be in the same ballpark as both food stamps and budget office estimates of this year’s net outlays on Obamacare. So we’re not talking about something trivial.

Speaking of Obamacare, that’s another thing Republicans would surely have killed if 2012 had gone the other way. Instead, the program went into effect at the beginning of 2014. And the effect on health care has been huge: according to estimates from the Centers for Disease Control and Prevention, the number of uninsured Americans fell 17 million between 2012 and the first half of 2015, with further declines most likely ahead.

So the 2012 election had major consequences. America would look very different today if it had gone the other way.

Now, to be fair, some widely predicted consequences of Mr. Obama’s re-election — predicted by his opponents — didn’t happen. Gasoline prices didn’t soar. Stocks didn’t plunge. The economy didn’t collapse — in fact, the U.S. economy has now added more than twice as many private-sector jobs under Mr. Obama as it did over the same period of the George W. Bush administration, and the unemployment rate is a full point lower than the rate Mr. Romney promised to achieve by the end of 2016.

In other words, the 2012 election didn’t just allow progressives to achieve some important goals. It also gave them an opportunity to show that achieving these goals is feasible. No, asking the rich to pay somewhat more in taxes while helping the less fortunate won’t destroy the economy.

So now we’re heading for another presidential election. And once again the stakes are high. Whoever the Republicans nominate will be committed to destroying Obamacare and slashing taxes on the wealthy — in fact, the current G.O.P. tax-cut plans make the Bush cuts look puny. Whoever the Democrats nominate will, first and foremost, be committed to defending the achievements of the past seven years.

The bottom line is that presidential elections matter, a lot, even if the people on the ballot aren’t as fiery as you might like. Don’t let anyone tell you otherwise.

 

By: Paul Krugman, Op-Ed Columnist; Opinion Pages, The Conscience of a Liberal, The New York Times, January 4, 2015

January 5, 2016 Posted by | Economic Policy, IRS Tax Tables, Obamacare, Tax Revenue, Taxes on the Wealthy | , , , , , , , | 1 Comment

   

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