Income Inequality and Growth

Bill Schneider’s column includes a quote from Joseph Stieglitz that points out something important:

Growth and inequality are not separate issues. Nobel Prize-winning economist Joseph E. Stiglitz wrote, “Politicians typically talk about rising inequality and the sluggish recovery as separate phenomena when they are in fact intertwined. Inequality restrains and holds back our economic growth.”

There’s something else that income inequality and economic growth have in common: our present crop of politicians have very little idea of how to promote either one.

I think that these are subjects on which intelligent people can differ but we shouldn’t confuse posturing with solutions. I see no reason that increasing nominal tax rates without increasing effective tax rates will reduce income inequality. Quite to the contrary I strongly suspect it will increase it.

I also see no reason that decreasing nominal tax rates will produce economic growth. The devil is in the details. If taxes are cut for the wealthiest, something we should not be surprised at since the lion pays the lion’s share of taxes, and they take the money and spend or invest it overseas, it will produce very little in the way of domestic economic growth.

Simply abolishing corporate income taxes without taking other steps to ensure more spending and investment here won’t do the trick, either.

I favor eliminating inefficiencies but that’s painstaking, unglamorous work rather than the masterstroke solution that most politicians prefer. I also think that a lot of our problems are a consequence of currency manipulation by our trading partners but that’s another subject.

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