The rhetoric in President Barack Obama's big inequality speech Wednesday was characteristically soaring. (One example: "The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American Dream, our way of life, and what we stand for around the globe.")
But the policy proposals were largely rehashes of past administration initiatives. What's more, a surprising number of them had little to do with tax or transfer programs. Things like increasing exports, reducing certain regulations, boosting spending on scientific research and other investments, and raising the minimum wage are intended to reduce inequality before taxes or transfer programs like Social Security and the Earned Income Tax Credit come into the picture.
That's a totally valid way of tackling the problem, and there are plenty of other initiatives, such as patent reform or reducing occupation licensing requirements, that would reduce inequality before taxes and transfers. Dean Baker at the Center for Economic Policy Research has a long list of worthwhile proposals along these lines.
But it's worth noting that you can get U.S. inequality down to the levels seen in extremely egalitarian societies like Sweden by doing nothing but changing tax and transfer policies. Pre-tax/transfer inequality in the United States, as work by the Luxembourg Income Study's Janet Gornick shows, is about equal to that of Sweden, Norway and Denmark. Finland, Germany and Britain actually have higher pretax/transfer inequality than the United States does. The only reason these countries enjoy such low levels of inequality is that their tax and transfer systems reduce inequality much, much more than the U.S. system does.
And, interestingly, the way they do that is by using relatively regressive but highly efficient consumption taxes to fund very generous welfare states. That's a marked contrast to the U.S. approach of having relatively progressive income taxes but stingier spending programs.
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