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Tax and Spend

By Matthew Yglesias  

"Tax and Spend"

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I’m a tax enthusiast, in part thanks to the work of Lane Kenworthy. But taxes are unpopular. So unpopular, in fact, that a combination of political opportunism and psychic revulsion from advocating for tax hikes leads progressives to spend a lot of time dreaming up ways to achieve beloved ends that don’t involve tax hikes. But so here’s a good Kenworthy post about how whatever happens with inequality, you help the poor by raising taxes and handing money over to poor people:

In some countries with little or no rise in income inequality, such as Sweden, government transfers increased and so did the incomes of poor households. In others, such as Germany, transfers and the incomes of low-end households did not increase.

Among nations with sharp increases in top-heavy inequality, we observe a similar disjunction. Here the U.S. and the U.K. offer an especially revealing contrast. The top 1%’s income share soared in both countries, and through the mid-1990s poor households made little progress, as the following chart shows. But over the next decade low-end American households advanced only slightly, whereas their British counterparts experienced sizable gains. The New Labour governments under Tony Blair and Gordon Brown increased benefits and/or reduced taxes for low earners, single parents, and pensioners. As Jane Waldfogel documents in her book Britain’s War on Poverty, these were big policy shifts, even if not always high-profile ones. They produced a significant rise in the real disposable incomes of poor households.

Now insofar as skyrocketing Anglo-American income inequality is a symptom of a dysfunctional financial sector, healing finance should boost growth over the long haul and make lots of people better off. But lots of inequality (i.e., superstars like JK Rowling and LeBron James leveraging global communications technology to get super-rich) has nothing to do with finance and also little to do with the fate of the poor. What’s relevant is that you need to have the gumption to take money away from people whose consumption has a low marginal value, and give it to people whose consumption has a high marginal value. And you want to try to do it in a way that doesn’t strangle growth. The Nordic countries are living out there on the frontiers of political thinking, and manage to tax almost 50% of GDP on a sustainable basis. But it’s all too rare that I see American progressives explicitly calling for a Nordic-style tax code.

Lucky for you, as a Christmas gift to the audience I’ll be unveiling my thoughts on ideal taxation over the holiday season.

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