How to Reduce Inequality

August 25, 2017, Ho Chi Minh City

When we talk about “fixing” inequality, we need to be clear: the question is how to reduce or moderate inequality, not how to eliminate it.

Rather than using redistribution to achieve moderation in inequality, it would be a far greater achievement to actually redesign our form of capitalism in order to enable everyone to have a “good job,” eliminating the need for welfare. This is possible, but a radical undertaking.

In the absence of such a radical redesign, and within the current system of property rights, it is going to take much greater will on the part of citizens and their elected representatives than is evident today in the US to alter our redistributive policies such as to reduce inequality.

It’s not a problem of inadequate policy tools. Policy created the inequality, or at least enabled and exacerbated it, and policy can fix it. Our government has many levers to effectively and fairly moderate inequality if we can find the political will.

These levers can be divided into three broad categories: those which reduce the income or wealth of the rich, those which are used to redistribute government revenue in ways which will reduce inequality, and the law.

Reducing the excess incomes and wealth driving up inequality starts with tax policy. Studies by Emmanuel Saez and others conclude that there is much room for increased income taxes on high incomes and wealth without destroying motivation. We could also use tax revenue management to motivate businesses to engage more in inequality-reducing measures. For example, for companies which pay their C Suite above a certain reasonable level vs their average employee salaries, there could be an added tax, or there could be a tax credit for those which do not, or both.

Similarly, we could use tax policy to incentivize corporations to invest in affordable housing in their communities. We could use taxes to encourage them to open their resources to new entrepreneurs–data, research, space, laboratories, etc. There is likely a proliferation of additional services of value which can be added to the present production of major companies without diminishing their existing opportunities.

In addition to providing corporate incentives, tax policy can be used much more directly on an individual level. In his now famous recent book Capital in the Twenty-First Century, Thomas Piketty recommends a wealth tax as the most effective way of dealing with inequality. It would ideally be global, so that the wealthy do not move to other countries to avoid the tax. Inheritance is a major component of growing wealth inequality.

The spending side of a government budget represents an array of levers to achieve reduction in inequality. At the top of the list is spending more on education. That’s because we have skilled jobs available for which our workers are not trained, and because the future of the US knowledge or digital economy is dependent on well-educated workers. The challenges of focusing on education for significantly increased government support are three: (1) There is little agreement as to what the future of education should be in programmatic terms. The pace of change in technology, as one major example, is confounding planners in preparing to educate children of the future. (2) Education takes a long time to pay off. If starting with the very young, the results may be 20 years in coming. This leaves a whole generation without benefit, unless there is a big program dealing with skills needs of adults without a college education. (3) No one trusts government to do anything well.

Education spending is the first step, but there are dozens of other ways to spend money that will not only reduce inequality, but help businesses and individuals across all income ranges. Infrastructure improvement is an incredibly important tool, one which benefits the poor as well as business and the wealthy. Why not?

There is also law as a tool. Greater pursuit and prosecution of corruption, shorter limits to patent protections, greater protections for workers vs. the corporation, and greater protections for labor unions are some of dozens (or hundreds) of changes that would make significant impacts on inequality in America.

It is right to acknowledge that none of the above solutions are likely to be put in place, and if any, it will likely be in an insufficient combination and force to make a major difference. Inequality is likely to continue to edge up, barring a radical comprehensive change, such as that which occurred as a result of WWII. Professor Walter Scheidel of Stanford argues that “war, revolution, state collapse, and deadly pandemics” are the only ways inequality can be reversed. My economics professor at SOAS in 2013, where I wrote a thesis on inequality, had the same opinion – revolution is the only solution. And, both good and bad, Dr. Scheidel expects none of these as likely to happen as in the past.

Some argue that increased economic growth will reduce inequality, but it hasn’t done so in past periods of strong growth. Government intervention in one of these or other ways will be required.

We have the highest level of inequality among developed countries, and it will inevitably continue to rise. We have abundant tools to reduce it, but we lack the political will to address it.

 

 

 

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