Dec 07, 2011 at 8:48 am
I asserted that while we must ensure that taxes and transfers are pushing back against the wave of higher inequality, you can’t restructure market outcomes through redistributive fiscal policy. You can offset them; you can’t fundamentally change them. And, if you don’t attack the root problem, you’re going to have to ratchet up the redistributive function every year, a Herculean lift.
That said, a number of commenters made the good point that tax policies create feedback between the primary and secondary distribution. Much higher tax rates at the top of the income scale are certainly associated with periods of less pretax inequality as shown here and there is a theory, with some evidence, that very high marginal rates discouraged obscenely high salaries.
There’s something to this, but a) much higher tax rates are not in our future, and b) the fact that we privilege different types of income through the tax code, like capital gains and dividends, means that you’d have to fix that first, or you’ll just have a lot of shifting stuff around (what was earnings will become something else, taxed at a lower rate). In fact, ending these preferences for one type of income over another would be a great policy advance, ending big distortions and raising more much-needed revenue.
BTW, conservatives argue that transfers through the safety net–welfare benefits, unemployment insurance–have pernicious effects on the primary distribution by discouraging work. Somehow, you give the poor and unemployed some help and they work less*; you give the rich a bunch of phat tax cuts and they work harder. Go figure.
*Robert Moffitt et al do good work on this question–see here re low-income programs, e.g., and here for lack of advertised response of the wealthy to tax changes (i.e., the rich do not massively respond to tax changes, as the current tax debate would have you believe; neither do the poor stop working when they get a boost from the safety net).
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