Column: The simple way to reduce inequality

In his speech on increased inequality Wednesday in Washington, President Barack Obama
said little about tax and transfer policies, which other nations use to lower income disparities.

Associated Press

In his speech on increased inequality Wednesday in Washington, President Barack Obama said little about tax and transfer policies, which other nations use to lower income disparities.

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.

© 2013 Washington Post

Income inequality, taxes and transfers

Everyone knows that the United States has high income inequality relative to other rich countries. But what you may not know, and what this work by the Luxembourg Income Study's Janet Gornick makes clear, is that this isn't the case before you take taxes and government transfers like Social Security into account. In fact, pretax income inequality in the United States is in the same league as that of the Scandinavian counties, Germany and Britain.

The numbers below show the Gini coefficient, the most commonly used measure of inequality. The Gini varies between 0, which reflects complete equality and 1, which indicates complete inequality (one person has all the income or consumption; all others have none). Other countries have adopted policies that reduce inequality far more than do U.S. measures.

Inequality of income

before taxes and transfers

Higher number shows more inequality

Britain0.63

Germany0.60

Finland0.58

United States 0.57

Norway0.57

Sweden 0.57

Denmark0.56

Inequality of income

after taxes and transfers

Higher number shows more inequality

United States0.42

Britain 0.41

Norway 0.37

Germany0.36

Finland 0.35

Sweden 0.33

Denmark 0.33

Column: The simple way to reduce inequality 12/05/13 [Last modified: Thursday, December 5, 2013 10:17pm]

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