Tuesday, April 12, 2011

Joseph Stiglitz on rising inequality

A lot of people (myself included) have been thinking lately in similar terms to Stiglitz here. Pretty important stuff for tax policy and other such subjects - although what we think may not matter, given the perverse "reverse insurance" element of rising high-end wealth concentration, in that it feeds on itself by concentrating political and economic power in support of creating still greater wealth inequality.

Until fairly recently, I would have said (and probably did say) that distributional concerns should really focus on helping people at the bottom, who may be in dire need. I saw much less reason to worry about the top versus the middle, despite the relative status concerns that can make this topic emotionally salient (relative to helping those in need) to people who are in the middle to somewhat upper ranges.

I still view that as the right approach for a steady state distribution that is not as top-heavy as the U.S. has become. But, as the Stiglitz analysis (if you agree with it) can be construed to suggest, at a certain point one has to think about extreme high-end wealth concentration through a pollution frame, rather than a standard optimal income tax frame.

More on this in my forthcoming (May 23) Tax Notes piece concerning 1986-style tax reform. And among the big takeaways for this week's politics, what with Obama's upcoming speech on addressing long-term deficit issues, is that high-end marginal income tax rates absolutely should not be cut as part of fiscal rebalancing, no matter how much base-broadening there is (and I expect next to none anyway).

The case for cutting the corporate tax rate is stronger, given the pressures of global tax competition, but if that's done it's vital to address the potential use by high-income owner-employees of lower corporate rates as a tax shelter. I was speaking to a practitioner the other day about the fact that lots of business owners are electing subchapter S status these days (under which a closely held company is taxed as a flow-through a la partnerships, with the income being taxed directly to owners rather than at the entity level). This practitioner expects subchapter S elections to wither away if the corporate rate becomes significantly lower than the top individual rate, since the opportunity to use C corporations as a low-rate tax shelter will then simply be too tempting despite the accompanying disadvantages (such as having to worry about shareholder-level taxes).

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