“Creating Jobs and Closing the Income Gap”

Can policy create jobs and reduce income inequality at the same time?:

Creating new US jobs and closing income gap, by Edward N. Wolff, Commentary, Project Syndicate: With unemployment climbing…, job creation is a key objective for policy makers. …President Barack Obama recently proposed to increase public spending by about US$600 billion over the next two years to create an additional 4 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.

America’s tax system has surprisingly little redistributional punch. … Total personal taxes are mildly progressive, increasing steadily as a share of income from 14 percent at the 10th percentile to 28 percent at the 90th percentile. But then they fall off sharply to 22 percent at the top, owing to the favorable treatment of capital gains and investment income.

On the other hand, total 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.

Government spending on goods and services, like education, highways, police, and sanitation, has distributional consequences, too. Public consumption is just as progressive as transfer payments. …

When you add together government transfers and public consumption and subtract taxes paid, you get a figure for net government expenditures.

This is extremely progressive. As a share of income, it declines sharply from 70 percent at the 10th percentile to -16 percent at the top (in other words, the top bracket pays more in taxes than it receives in government benefits).

The extremely progressive nature of net government expenditures comes about equally from government transfers and public spending; very little is contributed by taxes.

It is not just the poor who benefit from net governmental expenditures. The middle class is also a big beneficiary.

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.

If these packages target education (very redistributive) or sanitation, fire, police, and highways (mildly redistributive), they can create jobs and reduce inequality.

This seems to take the existing tax structure and its suprisingly small “redistributional punch” as fixed, or nearly so, but I don’t think we should. A revenue neutral increase in progressivity would not impede recovery, it would provide a mild stimulus as money moves from households with higher savings rates to households with lower savings rates. So the need for stimulus is not, per se, an argument against redistribution.


Originally published at the Economist’s View and reproduced here with the author’s permission.