Taxes and Inequality

I think that anyone who feels an attraction to progressive causes should read Lane Kenworthy’s post on the relation between taxation and inequality.  Lane is making an argument that I’ve found persuasive ever since I first encountered it a few years ago–that progressivity of taxation is something of a red herring.  Instead, most reduction in inequality comes from government expenditures–the size of those programs and how progressive they are.  For the hard evidence, read Lane’s post, but the idea should be intuitive: no matter how progressive a system of taxation is, if the government consumes a (relatively) small portion of the national income, the redistributive effects will be small.

A more controversial point is that it may be a good idea to accept less progressive but more efficient taxes.  The long lost Economist article where I first encountered the idea claimed that the Scandinavian states relied heavily on unprogressive value added taxes and sin taxes, which allowed them to fund large welfare states while maintaining robust economic growth.

The last is a point that can make some common ground between progressives and certain economically literate conservatives.  While many Republicans are just ideologically opposed to taxation and redistributive government programs, some folk are simply more worried about the efficiency effects of various types of taxes.  I don’t wish to overstate the case–it’s not as if you’ll get hardcore conservatives to embrace large government programs.  Nonetheless, it may be worth thinking about how those programs are to be supported, if you’re interested in political feasibility.

Lastly, what this doesn’t change is certain short-term political issues.  Even if progressivity in taxation isn’t the most important aspect of progressive policy, it’s still important to fight something like the Bush tax cuts, which merely give a handout to the wealthy, while also creating budget deficits that make it harder to fund government programs.

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