I have criticized the Times‘ and the Economic Times‘ editorial positions on various issues, as well as the quality of the material they carry many times over the past months. And things haven’t changed. ET carried a column by Edward Wolff about 7-10 days back; I bookmarked it so that I could write about it sometime – “Stimulating Equality”.
In the US, President Barack Obama recently proposed to increase public spending by about $600 billion over the next two years to create an additional four million jobs. But Obama is also concerned with reversing a sharp rise in income inequality (which is now at an 80-year high). Is it possible for leaders to do both at the same time?
The answer is unequivocally yes, but only if they focus on government spending rather than reforming their tax systems. That lesson is even more powerful for other advanced countries like Germany and France, which spend a far higher percentage of GDP on public programs (35% and 43%, respectively, in 2005) than the US (only 25%).
America’s tax system has surprisingly little redistributional punch. Using a measure of “comprehensive income” – money income, total capital gains on wealth, imputed rent on owner-occupied housing, non-cash government benefits, and public consumption – income taxes are generally progressive.
But government spending on goods and services, like education, highways, police, and sanitation, has distributional consequences, too, and can be allocated to actual beneficiaries in much the same way as government transfers. Educational expenditures are allocated on the basis of the number of schoolchildren in the family. Highway spending is allocated in proportion to the number of cars owned by the family and estimated miles driven. Collective goods like fire and police protection are allocated on a per capita basis.
Public consumption is just as progressive as transfer payments. As a proportion of income, it declines almost continuously, from 34% at the 10th percentile to 3% at the very top. The main beneficiaries of public spending are the poor and the middle class.
As Obama and other leaders around the world implement stimulus packages in the months ahead, they should recognize that the question of who benefits goes beyond the number of jobs created. Government spending, no less than government transfers, has actual beneficiaries. If these packages target education (very redistributive) or sanitation, fire, police, and highways (mildly redistributive), they can create jobs and reduce inequality.
Look at the words that are used. Wolff (an economics professor) has no doubt that egalitarianism is the way forward, that redistribution (reducing inequality) is a good (progressive) step. He doesn’t like “stimulating” the economy through tax cuts because that would mean people who are paying the tax – people who actually earn a good amount of money – will be the beneficiaries. But public spending means everyone benefits – particularly those who don’t earn a single cent, and those who are depend on some kind of government dole. Now there are two kinds of taxes – direct and indirect. Direct taxes are those that can be specifically targeted at individuals based on some criteria – income, wealth etc. Indirect taxes are taxes on goods and services where any one who consumes them pays the tax. Governments around the world try to soften the impact by not imposing any (indirect) tax (or by lowering it) on basic necessities; they don’t always succeed.
Now Wolff; as far as taxes go, note how he uses the adjectives progressive (precision targeting of the rich) and regressive (casting a wide net; even the poor are forced to pay for the facilities they use)-
- income tax – progressive
- social security taxes – mildly regressive
- sales taxes – steeply regressive
- property taxes – progressive
I don’t think much needs to be said. Income tax and property tax are progressive because they are taxes targeting the well off. The only reason he calls social security taxes mildly regressive is because sadly there is a cap on the taxes – if they were not capped, those earning more would have paid even more. And sales tax is steeply regressive because the tax does not discriminate between the rich and the poor.
The Keynesian that he is (he must be; only they advocate spending without considering that all spending has to be paid for either in the form of future taxes, or inflation), he prefers public spending; the re-distributor that he is, he prefers public spending for its “redistributional punch”-
[T]otal transfers have a much bigger equalizing effect on incomes. Cash transfers, like social security and unemployment insurance, are highly equalizing. When the value of non-cash government benefits, like Medicaid, Medicare, and Food Stamps, are also included, total transfers become extremely progressive. As a proportion of income, they fall almost continuously, from 50% at the 10th percentile to 2.5% at the very top.
I simply don’t trust the State, and a State that has its hands in your pockets also has its hands on your collar. As far as I am concerned, there is absolutely nothing wrong in restating Proudhon’s senseless statement “all property is theft,” as “all taxation is theft.” And this is especially true of central taxes. Taxation can be a legitimate subject matter at the city or state level – for the services that they provide. If your present city, or state is corrupt, you can always move to a city or state that is investor and people friendly, and which is glad to let private companies serve consumers. Such states would hardly need to impose too many taxes; they could even do with some kind of voluntary, donation based system. But this is not possible at the central level. A non-voluntary taxation system (voluntary means people won’t be jailed, or their property confiscated, if they don’t pay the tax) means a new bureaucracy whose only function is paper pushing and harassment.
The redistribution aspect tends to get lost in the taxation minutiae. But that is the most important point in the whole article – increase public spending, and don’t cut taxes, because then redistribution won’t happen. The goal of the modern welfare state is egalitarianism – equalizing the unequal. Since people’s productive abilities cannot be equalized by fiat, their wealth is – through “progressive” taxation.
Rand launches a scathing attack on such egalitarian thinking, on “desirable goals”, in the chapter “Collectivized Ethics” from her book “The Virtue of Selfishness.” The basic idea she conveys is – you cannot simply run over man’s rights to achieve whatever stupid, Utopian dream you have about a society where all people would be happy and peaceful if only men sacrificed or gave up or contributed or distributed some of their wealth towards some “goal”, or did their “duty” towards society. She writes-
All public projects are mausoleums, not always in shape, but always in cost.
The next time you encounter one of those “public-spirited” dreamers who tells you rancorously that “some very desirable goals cannot be met without everybody’s participation,” tell him that if he cannot obtain everybody’s voluntary participation, his goals had jolly well better remain unachieved—and that men’s lives are not his to dispose of.
And, if you wish, give him the following example of the ideals he advocates. It is medically possible to take the corneas of a man’s eyes immediately after his death and transplant them to the eyes of a living man who is blind, thus restoring his sight (in certain types of blindness). Now according to collectivized ethics, this poses a social problem. Should we wait until a man’s death to cut out his eyes, when other men need them? Should we regard everybody’s eyes as public property and devise a “fair method of distribution”? Would you advocate cutting out a living man’s eye and giving it to a blind man, so as to “equalize” them? No? Then don’t struggle any further with questions about “public projects” in a free society. You know the answer. The principle is the same.