Category Archives: infrastructure

Wealth Inequality vs Income Inequality

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The Yale Economist and Nobel Prize winner, Robert Shiller, has an article in today’s New York Times, “Better Insurance Against Inequality”, proposing that “taxes should be indexed to income inequality so that they automatically become more progressive – meaning that the marginal tax rate for the highest income people will rise – if income equality becomes much worse.”
CaptureWe do know, of course, that income inequality is steadily increasing in the U.S. It is in fact essentially folklore that the top 1% of Americans is collecting a larger and larger share of the national income. Furthermore the French economist, Thomas Piketty, has recently shown that there is also “a relentless widening of disparity in wealth”.
Our democratic political system will surely respond in some way to this increasing gap between the rich and the poor. It is important to our future wellbeing to respond in a constructive manner. Today’s top tax rate of 39.6% is already very high and Mr. Shiller admits that the top rate would have to rise well over 75% in his plan.
Our biggest economic problem today is a stagnant economy. We badly need faster economic growth, in order to put people back to work and to bring in more revenue to shrink the deficit. Today what we need is lower tax rates, to put more money in the hands of people who will spend it, including potential entrepreneurs who will invest it in new businesses. Raising tax rates to address rising income inequality is therefore self-defeating as an economic strategy.
Rather let’s tax people’s financial assets after they have earned their money. A 1% wealth tax with a relatively high $10,000,000 personal exemption would bring in approximately $200 billion per year.  $200 billion per year would enable us to pay down our deficit at a much faster rate as well as having a lot left over to begin an extensive infrastructure renewal program (for example)!

How Do We Break Out of Our Economic Rut?

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The U.S. economy is in a rut. On the one hand, growth is stagnant, unemployment is high and huge deficits are leading to massive debt. On the other hand our population has an increasing number of retirees and also an increasing number of low income (often immigrant and minority) service workers. These groups demand more services in the form of entitlements and social welfare programs. In a democracy these needs are hard to deny. Is it possible to better stimulate the economy, alleviate inequality and shrink deficit spending at the same time?   I believe it is!
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  • Stimulating the economy. The best way to do this is to lower both individual and corporate tax rates in a revenue neutral way by eliminating, or at least greatly reducing, tax preferences. Faster growth of GDP will both reduce unemployment and bring in more tax revenue and thereby lower the deficit.
  • Reducing inequality. I join many others to propose a large scale, government funded, infrastructure development program, badly needed for its own sake, but also as a way of putting hundreds of thousands, if not millions, of people back to work. However, and this is essential, it has to be paid for by a major new source of revenue. My own preference is to establish a new tax, on the assets of very wealthy people, say with a net worth of $10,000,000 or more. An asset tax of between one and two percent per year would bring in several hundred billion dollars and also represents a highly visible way of reducing inequality without adversely affecting the economy.
  • Shrinking the Deficit. One of the biggest problems with many federal programs is that there is neither built in quality control nor cost control. There is little incentive for either Congress or federal bureaucrats to set priorities and control costs. A good way to change this system is to devolve many federal programs back to the states where such controls do exist. I will have more to say about this in future posts.

Big changes are needed at the federal level to get our economy back on track and put people back to work. There are ways to do this and we simply need leaders with enough vision and determination to get the job done!