Wednesday, 6 March 2013

What to Do When You Can't Tax Wealth

Ezra Klein points out that wealth inequality really sucks:
There’s a strong case to be made that what we worry about when we worry about economic inequality makes much more sense in terms of wealth than income.Take social mobility. A family might be doing fine on the income scale but still living hand-to-mouth, with little left over to pay for the child’s SAT prep or college tuition. A family with wealth, on the other hand, can always liquidate some assets to invest in their child’s future, and they can do so without worrying that they won’t be able to pay next month’s mortgage.Political power works similarly. A young hedge funder who just got her first big bonus might show up in the top 1 percent of the income distribution. But she’s still paying down college loans and saving up for a house and waiting to see whether these incredible checks keep coming. She doesn’t have the security to be trying to purchase politicians.But someone in the top percentile of the wealth distribution? They’ve probably been very comfortable for a long time, and they know they have the resources to continue being very comfortable for a long time, and so they can make speculative investments in politicians.
 Ezra hits on the crux of the problem, which is that wealth inequality is more pernicious than income inequality because it reduces equality of opportunity. We want a society which is broadly meritocratic, where the smartest, most hardworking people who can do things people want done get paid the most. And one obstacle to that is wealth inequality.

The problem is that we can’t tax wealth, because taxing wealth is really hard and has deleterious economic effects. Essentially, while wealth inequality is bad, wealth itself is obviously good and we don’t want to discourage it. So we have to find some other way of dealing with the problem. The Economist magazine released a report a couple of months ago calling for a number of changes to mitigate inequality.

We could address inequality in quite a few ways, but I think the problem is that whatever your policy prescription is, we’re already doing it.

We could invest more money in education so that people who are smart can rise to the top whatever their background. But education spending has risen a lot over the last decade (especially in the UK), and it’s not clear that it’s had that much effect on equality or on outcomes.

We could encourage – or force – poor people to save. This would reduce inequality without having to take wealth away from any of the rich. But to some extent we already do this. People pay national insurance contributions (payroll taxes in the US) and that entitles them to certain benefits. So they’re essentially saving for their retirement (and getting a generous subsidy to do so) without it showing up as wealth. I think a semi-private forced saving model, Singapore-style, might make people better off – but transition is hard and it would probably be a political nonstarter.

So the outlook is pretty depressing. It doesn’t seem like there’s a lot more we can do. And indeed the evidence is that inequality is really, really, really intractable. But there are a few things we could do.

Perhaps the most promising is deregulating the planning process – making it easier to build stuff and in particular tall stuff in big cities. This would push down house prices, making it easier for poor people to get on the housing ladder. It would provide steady construction jobs, resisting the bifurcation of the labour market (or be done cheaply by immigrants, which would be good too).

Perhaps most importantly, it would mean more people could afford to live in dense, high-productivity cities. In the (excellent) HBO series Girls, in order to make it as a writer, Lena Dunham’s character has to spend time working as an intern – and she can only afford to live in New York because her parents help her pay her rent. This is one of the biggest problems caused by wealth inequality. Even education-sceptics will acknowledge that the skills and networks you acquire through on-the-job training and internships are valuable. But few people without deep-pocketed parents can currently afford to pay London’s exorbitant rents while working for very low pay or even for free in order to work towards getting a high-paid job. Perhaps if the South Bank looked a bit more like Manhattan it wouldn’t be so hard.

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