Monday, April 10, 2017

Socialism Reconsidered - Part 4 - Thoughts on Income Redistribution

Looking for a silver lining in the dark cloud, in this case the dark cloud is the debacle in the House with the failed plan to replace the Affordable Care Act, one thing that the process made evident is that there are strong elements of income redistribution in ACA.  Subsidies are provided for those who purchase their health insurance in one of the exchanges.  Those subsidies are funded by a tax on wealthy taxpayers.  That so many have come to benefit from the coverage they get through ACA and to appreciate that benefit, in spite of the harsh rhetoric against Obamacare, suggests (at least to me) that one might consider other social policies not in the healthcare arena that are just as beneficial and also entail elements of income redistribution. How intensive should such policies be?  What determines this?  Are there limits to income redistribution?  If so, what is the source of those limits - politics, economics, ethics, or perhaps something else?  Those are the sort of questions I want to take up here.

Usually in our discourse we associate income redistribution with liberalism - Social Security, Medicare, and ACA were all introduced under Presidents who were Democrats, with Congress controlled by the Democrats as well.   So one way to think about the questions here is to ask what it would take to restore such control, say in the election of 2020.  However, a different way to consider this is to ask whether some income redistribution currently not underway would be endorsed even by conservatives.  While our national politics now seems broken, there was certainly a lot of rhetoric around a national infrastructure plan after the election in November.  If implemented, such a program would provide many construction jobs, boosting the demand for blue collar workers. This, in turn, would have substantial income redistribution consequences.

Part of what needs to be thought through regards who pays the tax and whether that is done willingly, as a matter of social obligation, or instead if it is coerced even while it is openly resisted.  Social Security, for example, is mainly income redistribution across generations of people, from (younger) current workers to (older) retirees.  As long as this appears stable and not a Ponzi scheme, current contributors should do so willingly, as they will eventually become recipients when they retire.  Paul Samuelson's paper An Exact Consumption-Loan Model.... gives the economic foundations behind this idea.   At issue now is whether demographic changes have rendered the situation unstable.  Why contribute while working if you will not be a beneficiary later?  (I should add that as a retiree within the State of Illinois, where the retirement system was designed as a substitute for Social Security, this is a big time issue for the State, which carries a very large debt now.)  A sense that the situation is unstable (most people don't have the wherewithal to do the math needed to consider whether shoring up the system is feasible or not, so they rely on the hearsay of others) would then make a current worker reluctant to contribute.

This gets me to a different type of income redistribution, you might call it Robin Hood income redistribution, where the rich contribute and the poor are the beneficiaries, with no reciprocation at all. In prior essays in this series I've referred to a Rawls Veil-of-Ignorance approach.  If ahead of time you don't know whether you will be rich or poor, how much income redistribution would you agree to is needed to make the system as a whole work?  (For those who haven't read Rawls, he focused on the welfare of the worst off in society to measure how well we are doing socially.)  Related to this is an after the fact sense among those who are rich.  Is there a feeling of social obligation to contribute, simply as part of being a good citizen?  If there are such feelings of social obligation, is that in itself sufficient to remedy the various problems that inequality engenders?  In other words, does individual initiative suffice or is government necessary to channel those feelings of social obligation to productive use?

In trying to consider these questions, I think it useful to look at a parallel activity of social obligation, namely voting. People should be aware of the paradox of voting, which argues that voting in any election with a large number of voters is irrational, as the vote of any one person almost certainly doesn't matter to the outcome, while there are attendant costs to the activity implicit in the time it takes to vote.  With charity there is something similar.  An individual's contribution to a charity that has a broad constituency hardly matters to the well being of that constituency.  One can have charitable giving that does matter, by having it targeted narrowly.  But this puts the giver in the position of King Solomon, having to determine a worthy recipient.  Most people, and I count myself in this category, don't want to make such a choice.  This limits the extent to which they will give to charity, even if they do have a social conscience.

Partly for this reason, those among the left who think there should be much more income redistribution than there is at present, focus on the benefits to the recipients and don't seem to care whether the donors give willingly or by coercion.  I haven't heard this expression in a while, but when I was a teen and on into my early twenties many a sentence began with "When the revolution comes..."  This thinking of income redistribution as a revolutionary activity is Marxist in conception.   It may be appealing from a sense of social justice.  But one wonders whether it can be expected to happen via our normal democratic processes.

Voter participation is quite low in our country.  Poor people vote less than everyone else.  A true populism that emerges from universal voting participation might be sufficient to produce a Marxist conception of economic justice, but we are nowhere close to that now. As things currently stand, money matters a lot in elections.  The monied interests that actively want to resist Robin Hood policies are winning the political game as of now, evidenced by the Republican control of Congress and the White House, as well as their control of many Governorships and State Houses.

For this reason it seems sensible to try to identify those who are well off who do have a social conscience, make an appeal to them to join cause with the rest of the population, and develop an electoral strategy and a set of policies around income redistribution that are consistent with this approach.

There are obvious political risks in doing so, as being open about raising taxes on upscale Democrats might drive such voters into the Republican fold.  However, given the present situation where the Democrats are in the minority, it seems to me this is a risk worth taking. To date, there has been little leadership on this point. Sometimes leadership requires delivering unpleasant but necessary messages.  So it seems to me that those who want to see more income redistribution should be focusing much of the message on the upscale people who will pay more in tax and make the case to them, with a lot of talk about the additional obligations they need to assume for the good of the order.  The rest of this piece tries to do just that.

* * * * *

Many of these ideas are not new for me.  I have been cooking on them for some time, driven to consider these issues by the ascendancy of the Tea party.  I found the "taxed enough already" message offensive.  I needed to think through an alternative.  I started to do this in writing in April 2011.  I began writing a variety of posts, with the very first this one, a riff on a well known Henny Youngman joke, called Raise My Taxes --- PLEASE!  That was followed by a more serious post where I gave my then current ideas about what should happen to taxation.

As I was recently retired when I wrote that piece and my mom had outlived the estate to support her home care, much of the suggestions addressed those particular concerns.  But I did offer up some other ideas which I still subscribe to.  One of those is that income tax should be based not just on the previous year's income, but rather on an average over the last several years.  This gets a little closer to taxing wealth (a stock) rather than taxing income (a flow).  Further, to the extent that there are variations in income that are not predictable, this means that some of that variation will be taken out of the equation in determining the amount of tax owed.   This other suggestion is most germane to the current discussion.  The benchmark income level in the recommendation, $100,000, comes from the income distribution tables for the year 2009.

(F) Raise marginal tax rates gradually for all households starting at the 80th percentile, $100,000 a year, in such a manner that reaching the 98th percentile you have the Obama proposal to eliminate the Bush cuts. That is the burden of tax increases should be much more broad than is being proposed at present. The message needs to be shared burden, not punitive on the rich.

Note that with this suggestion, the tax increase is entirely separated from its possible use. This is how many people will evaluate it, whether it is a tolerable burden or too severe.  We have this peculiarity in our public policy that we do not try to allocate the existing taxes we pay to their various uses, so in general people don't expect such a linkage.  But for a fundamentally new program that has a redistributive element, the incremental taxes needed to pay for the program have to be identified.  If the voters are to approve of the new policy, they presumably compare their incremental tax to their perceived social benefit.  This is not a good way to get at income redistribution, especially when done program by program, with those proposed sequentially.  The voter wants to know the bottom line for the entire package of programs to be offered.  If the bottom line is acceptable, then the voter expects that the programs in aggregate to be designed to balance with the incremental tax revenue collected.

I will return to this suggestion after I give a fuller accounting of my efforts to discuss income redistribution.  On tax day in 2011 I started a Facebook Group called For A More Compassionate and Saner America.  It is dormant now (so even if the ideas of the group are appealing there is no reason to join it at this point).  Back then I was more naïve and idealistic about what such a group might accomplish.  This is from the description.

The primary goals of the group are to restore responsibility and rationality in American politics. The immediate pressing issue is taxation.

By joining the group members who are in the upper tax brackets indicate their willingness to restore the tax rates which existed under President Clinton.

While the group did have interesting discussions for a while, it soon plateaued in its membership.  I am not entirely sure why but a few months after the group started Occupy Wall Street began.  Occupy was much more visible and garnered a lot of attention.  Given that, For a More Compassionate and Saner America seemed superfluous to me.  Occupy gave us the language of the 1% and the 99%.  On the one hand, that is helpful as there is terrible income inequality in the country.  On the other hand, it ignores that income inequality has increased between the 50th percentile and the 99th percentile.   To see this, consider the following table, which I showed in Part 2.  The data comes from Census table H-1 for All Races.  I differenced the numbers in adjacent columns, which is what is in blue.   Those numbers measure the quintile "width."

Table

Consider the fourth quintile, which includes the 60th percentile through the 80th percentile.  Quintile width has risen over time from 2010 through 2015.  Total growth is more than 15%.  Inflation over the same period was less than 10%.  So the quintile got wider in real terms, meaning the 80th percentile folks got further away from the 60th percentile folks in income (and therefore further away from the median).  You can do the same sort of thing for the 9th decile (from the 90th percentile to the 95th percentile). Its width grew even faster, more than 20% over that period. 

So Occupy made what I believe was an error, to not require greater sacrifice from the "professional class," which I define as those people with income at the 80th percentile or above but below the upper boundary that defines the 1%.  (This page does this with Adjusted Gross Income, rather than with Income so excludes income that might be placed in a tax deferred saving vehicle.)  Exactly where that upper boundary is I am not sure, but I think it not bad to use the focal point of $500,000 while keeping that line fuzzy.  

One big point I want to make here is that social responsibility is an ethical matter and with such matters there is a tendency to follow the lead set by others, even as we think we are exercising our own acts of conscience.  If it is only the 1%  (or even the smaller group of uber rich, the 0.1%) that group will more actively resist suggested tax increases.  If it is the entire professional class and the 1% in addition, then acceptance of the tax increases is more likely, especially if there is the appropriate leadership to promote the idea.

Indeed on how acceptance of these ideas might happen, I wrote the following in a post specifically about salaries in Higher Education, where I described my personal fantasy that well paid people in Higher Education would voluntarily accept compression of their salaries so their pay would be closer to the mean. 

With the underlying salary mechanics understood at this basic level, another part of the fantasy is that a Gladwell-like Tipping Point mechanism emerges in service of the salary compression function idea.  It might begin with other economists, much better able to deal with the real empiricism of the situation than I am, to establish the extent and magnitude of the sector specific rents and the shape of the salary distribution function.  (Usually reported are mean salaries, perhaps sorted by academic rank, but that is really insufficient to understand the issue.  One needs to look at the entire distribution and see how that has changed over time.)  Then journalists and others spread the word about self-regulation as a possible alternative to government interference.  After that the star performers themselves would begin to embrace salary compression as the embodiment of a Ron Hunt, take-one-for-the-team approach to the hyperinflation issue.   Here I'm talking about Nobel Prize winners, MacArthur "genius" Award winners, and other illustrious scholars.  This group would form the vanguard of the movement.   In turn they would convince forward thinking high level administrators - university presidents and chancellors, that salary compression would be good for the entire sector and good for their individual institutions.  With this leadership group on board, faculty governance groups then take up the matter in earnest.  (At Illinois, this is the Faculty Senate.)  They too express their approval.

This sort of mechanism is what I have in mind, considered more broadly to sustain income redistribution in the society as a whole, funded by increases in tax on those households at the upper end of the distribution. 

Let me close this section with the salary compression function itself, which I made for illustration purposes only.  It was the simplest possible function that did what I wanted it to do.  It held harmless people at the low end of the salary distribution.  (The cutoff point, $100,000, was chosen because it is easy to remember.  But note that if in a two earner household at least one of the earners makes $100,000 or more then the household will be in the professional class.)  It respected the pecking order.  Further, it was in accord with the principle of progressive taxation so the percentage decrease in salary after compression was an increasing function of salary prior to compression.  These properties remain desirable in any "tax increase function" that we might come up with. 

* * * * *   

In this section I want to consider an illustration of such a tax increase function, with the illustration meant to promote further discussion about the ideas, not to be a concrete proposal in itself.  But before doing that let me briefly note that income taxes are a complicated animal.  Once source of complication is differences in filing status.  Another complication is given by differences in AGI for people who have the same filing status and before tax income, say because one household has a 401K plan, while the other does not.  Then within fixed AGI households will differ both in the number of exemptions they claim and in the deductions they take.  Taxable income is the income left over from AGI when exemptions and deductions have been accounted for. Within each filing status, there is a tax function of taxable income.  But there is no tax function of before tax income.  I'm going to ignore that in what follows and act as if there is only one filing status and that before tax income maps to taxable income in a unique way.  For that reason, when I talk about raising taxes, I don't care whether that occurs by closing loopholes or by raising rates.  For a more nuanced discussion of income taxes those matter, but I'm going to ignore the nuance here.  Likewise I'm going to ignore demographic characteristics of households - location, age of family members, and health status just to mention a few key parameters.  These factors do matter in fact.  But bringing them into the discussion now just makes things more complicated than they need to be.

Before writing this piece I spent considerable time to see if I could identify some principles that taken together would determine how much more in tax a household should pay.  The underlying thought is that if we could agree on principles, determining them would be the hard work.  Then deriving the tax function from the principles would be a straightforward process.  For example, one might consider some base year where we thought income inequality was not too bad and tax rates were reasonable.  (I'm thinking that 1983 might be such a year.  The first set of tax cuts under Reagan had been put in place by then, but iincome inequality was still not an issue in the public consciousness at the time.)  Then a tax reform that produced a similar rate structure and similar inequality might be what we're looking form.  But before tax incomes are definitely more unequal now.  So that would seem to require more income redistribution.  A mere return to tax rates of 1983 would not suffice.  Plus, there are many confounding factors.  To mention just one, interest rates are much lower now.  This impacts the interest deduction for the home mortgage.  Taxable income is higher because interest rates are lower.  Do you try to account for this or ignore it?

Ultimately I decided it was just too hard to appeal to first principles here, meaning I wouldn't be able to write this piece for quite a while.  So instead, I eyeballed the numbers and made up a hypothetical tax increase function off the top of my head.  As my purpose is illustration only, I hope this admission doesn't prevent readers from taking a look at what I produced. 

You can see what I did by downloading the Excel Workbook Income distribution Modified and looking at the spreadsheet called Wikipedia2014.  I copied the table for household income distribution for 2014 that is from Wikipedia, which in turn is from the Census.  That information is in columns A through G of the Excel.  I split the screen for easier viewing.  You can scroll in the lower pane with the two header rows in the upper pane intact.  Let's describe the information that is given in this table.

There are roughly 124.5 million households.  Those households vary in size, they vary in the number of earners, and they vary in the income earned.  If you do this more carefully than I will, all those variables matter.  A single person making $50,000 is not doing too badly, though that household would be below median in income.  A family of eight with $80,000 in income might be struggling to make ends meet.  Noting that, from now on I will focus on household income only.  

Household income is divided into bands of width $5,000 starting at zero and going through $200,000.  There is then one band of width $50,000, which goes from $200,000 to $250,000.  The last band has in essence infinite width.   It goes from $250,000 to whatever the top earning household in the country made (I'm guessing that is more than $1 billion but less than $10 billion).   Unfortunately, there is no band for just the 1%, so this last band includes households in the professional class as well as the 1%.

The table gives the number of households, the percentage of the population, and the mean household income in each band.  That mean has to be greater than the lower endpoint of the band and less than the upper endpoint of the band.  The percentile cumulates the percentages of all bands of lower income.  So median household income (50th percentile) is somewhat below $55,0000.  The 80th percentile is just below $115,000.  Thus households at the 80th percentile have more than double median household income. The 90th percentile is just below $160,000.  Households at the 90th percentile have not quite triple the median household income. 

What I did is in columns H through M.  I started the tax increase policy in row 26, with lower income in that band of $115,000.  This is slightly above the 80th percentile, but by the nature of the table it is not possible to be more granular than that.  In column H the percentages are cumulated for all bands of higher income and include the percentage in the given band.  In theory, the entry in column D added to the entry in column H should equal 100%.  It's close, but not quite.  I suspect this is due to round-off error with the percentages.  So there is a lack of precision here.  But it is good enough for our purposes.

Given that there already is mean income for each band, column I gives cumulative mean income including the current band as well as all bands with higher income.  What would be nice to have is tax already paid by these folks.  We don't have that information.  Here let me just say what I have in mind.  For my own household we pay federal income tax, state income tax, and local property tax.  There is also sales tax and various licenses and registrations, but I'm going to ignore those.  If you sum the federal and state income tax along with the property tax you get a tax burden figure that you can compare to total income.  I'm suggesting that for the professional class and the 1% that the tax burden rise and I'm giving suggestions as to the amount they should rise, but doing that without knowing the prior burden makes it hard to say if the increases are too much or not enough.  What I'm hoping for here is that the reader, aware of his or her own income and tax situation, can make some determination about whether the tax increases are reasonable or not.  The mean income and cumulative mean income are intended as help in that determination.

Also, let me give a word of caution that the reader not confuse tax bracket, which gives the marginal tax rate for the household (the amount of additional tax to be paid if there were an additional dollar of income) from the effective tax rate on taxable income or the average tax rate on AGI.  The tax bracket will be higher then the effective tax rate.   For 2014, the tax brackets can be found here.  My household was in the 28% bracket.  Our effective tax rate on taxable income was 18.25% and our average tax rate on AGI was 17.4%.  Across years, the boundaries of the brackets adjust for inflation.  If your income went up with inflation and all your deductions did likewise, your effective tax rate should not change from one year to the next.  If your income rose faster than inflation and/or your deductions didn't rise as fast as inflation, you taxable income will have grown in real terms.  Then, because the bracket is higher than your effective tax rate, your effective tax rate will be higher this year as compared to last year.  

In what follows we are talking about increases in the average tax rate on AGI.  The policy to consider is given in column J and gives the percentage increase in the average tax rate.  The policy is a step function.  There are several adjacent bands that get the same percentage increase.  Then there is a step up so that the next several bands get a higher percentage increase.  The impact of the policy can be seen in columns K and L.  In column K the increase in tax paid is for the lowest income in the band.  In column L the increase in tax paid is for the mean income in the band.  This step function approach to a policy is for simplicity.  The reader should be readily able to figure out what is going on. 

However, I should note that this step function approach violates preserving the pecking order.  (Preserving the pecking order means that if one household has larger before tax income than another household, the first household should also have larger after tax income.)  To preserve the pecking order there can't be any steps up.  The policy must be a continuous function of income.  So while looking at the policy in the spreadsheet, the reader should imagine that the percentage increase at the lowest income in the band matches the percentage increase at the highest income of the previous band and that the percentage increase rises gradually within the band.  But including that detail in the spreadsheet seemed more effort than it was worth.  One can construct a piece-wise linear and continuous policy that does respect the pecking order and generates the same revenue within each set of bands that constitute a step.

Now some general comments on the shape of the policy.  The steps are all upward, so in that sense the policy is progressive.  Higher incomes get higher increases in tax within a step.  Then the rate of increase in tax goes up with the next step.  The steps also increase in magnitude.  This fits my sense of taste so I want to explain why I did that.  I'd rather have fewer steps, if possible.  Too many and it gets very complicated.  But the first step is very small, only 0.25%, leading to a small increase in household tax of around $300.  Any policy should start with a very small step.  If there are only a handful of steps in total and the last one is reasonably high (I'm not going to define what that means but I'm referring to the 12.5% increase for the top band) then the steps have to increase in magnitude as we go along.  

The boundaries of the steps were done by eyeballing only.  I knew ahead of time that I wanted the penultimate step to be 5% and the ultimate step to be much higher than that.  While the reader may disagree, I felt it reasonable that a household with $200,000 of income pay an additional $10,000 in tax.  The shapes of the preceding steps were done hastily, just to get something that works.   The one place where this work doesn't agree with my own sensibilities is the 12.5% increase at $250,000, leading to an increase in tax of $31,250.  That seems too large to me.  Indeed, the highest band probably should be divided into two or three bands and a household with income $250,000 should see an average tax increase of 6% or 7% but no more than that.  It is the uber rich who should see the highest step.  But the uber rich are not singled out in this table.

Column M then gives the increase in tax revenue generated by the policy for each band of income.   For incomes below $160,000, the policy generates less than $1 billion per band, chump change by the Everett Dirksen standard.   While the bulk of the tax revenue generated comes from the top band, there is substantial revenue generated by penultimate band and not inconsequential revenue generated by the bands between $160,000 and $200,000.  

The aggregate generated is in excess of $243 billion, a hefty amount.  Nonetheless it limits how much income redistribution can be done.  One reason for computing the per household increase in income for households below median in income is to serve as a benchmark for other income redistribution programs.  Some low income households will end up receiving more than this amount, perhaps in the form of free college tuition, or as a subsidy on health insurance, or in wages for a construction job that came about from an infrastructure program.  But that means other low income households will not get even that benefit.  This means we need to prioritize the recipients of income redistribution (how to do that is something to consider elsewhere, not in this essay) as well as to prioritize which government programs should be undertaken with these revenues.  

* * * * *

In this section I want to take on various caveats and potential criticisms that can be anticipated in advance.  I don't intend to fully resolve these, but I do want to acknowledge the issues so others can reflect on them further.  

Might households or groups take actions to undo the effect of the approach to income redistribution discussed in the previous section?  If so, does that render the approach inert?

One should ask how the household pays for the tax increase.   If the household had been giving substantially to charity and reduces the charitable giving to pay for the tax increase, the upshot is that there wouldn't be any more income redistribution.  Likewise, household members could have been doing a substantial amount of volunteer work that benefits low income people, but after the tax increase they do more paid work instead.  This too would undo the policy.  In contrast, reduction in consumption purchases or in how much gets socked away in various savings accounts is the type or response that is hoped for.  So one might ask how does one get the latter but not the former.  My belief is that if people voted for the income redistribution, that would mean they understood what was expected of them and behave accordingly.  People who had such a tax increase imposed on them unwillingly would be more prone to undo the effect of the approach.

While I haven't said this explicitly, I've been assuming that these tax increases occur at the Federal level.  Might some of the states undo this by lowering tax rates on their wealthy citizens and reducing government services to their poorer citizens?  Just this sort of thing seems to be happening in many Midwestern states now, even without the tax increase at the Federal level.  This points to some coordination in electoral strategy needed between State contests and Federal contests.  If further income redistribution makes sense it has to be done in both locales.   

One other way that the policy might be undone is if high level executives in well-to-do corporations can shift their income, which is taxed heavily, to business earnings that can be shielded from tax, while nonetheless utilizing the income for personal consumption or personal saving.  Of course, some of this is going on already.  The issue here is whether more of it would happen were the proposed household tax increases to go into effect.  Assuming that some more of it would happen, the issue then is whether it would be a big deal or not.  I don't know.  But it does seem clear that before such an income redistribution program is introduced, we need good answers here.  This leads to the next question.  

It is said that corporate America is sitting on something like $2 trillion in liquid assets, a good chunk of which is currently abroad for tax avoidance purposes.  Is that money a potential target for income redistribution?  Put more colloquially, if corporations are individuals, shouldn't they pay their fair share?

I want to respond in two distinct ways to these questions.  First, the idea that social responsibility can be expressed as paying more in taxes should be considered an innovation.  The embrace of this idea can then be thought of as adoption of the innovation.  Like any innovation, adoption will follow along a diffusion curve.  Since above I've already linked to Malcolm Gladwell's book, The Tipping Point, those who want to see substantial income redistribution should want there to be few if any impediments to reaching the tipping point.  Those who actively resist taxation might provide such impediments.  Thus, it makes sense to me to suspend going after corporate wealth until the innovation has diffused substantially.  

Second, the tax policy discussed in the previous section was a guess, nothing more.  I hope it is a good guess.  If it were to be implemented, I'd want to do implementation in two or three stages, where each stage entails a higher step function than in the previous stage.  The idea is to err on the side of making the steps too small.  Let the taxpayers respond that the increase is not overly burdensome and they can do more. That sort of response would aid the diffusion of the idea.  If enough people gave a contrary response that the tax increase is too burdensome, it would end up blocking the idea altogether. The staged approach to implementation would also allow some learning as to what the right tax increase function should be. 

Won't the approach to income redistribution impact the underlying income distribution itself?  If so, might we be shooting ourselves in the foot by implementing redistribution policies for that reason?

There are two different ways that income redistribution might impact the underlying distribution itself.  One is via the Keynesian multiplier.  The other is via incentive effects on income generation.  My own biases are that I am a Keynesian and I think the case for taxes as a (dis)incentive is way overblown.  I will briefly sketch the Keynesian story, since I believe it is valid.  I will not take on the tax as incentive issue here.  Somebody else should make that argument.  

Our economy is in slow growth mode.  It is demand constrained.  A Robin Hood income redistribution raises aggregate demand because the poor person who receives the money is more apt to spend it, while the rich person who paid the tax would have more likely saved it.  The increased aggregated demand boosts GDP.  That boost, in turn, raises aggregate demand more.  It is that second effect which is the multiplier.  Under this story, the income distribution is impacted in a beneficial way.

* * * * *

Let's wrap this up.  There may be psychological reasons why we focus on the needy when considering income redistribution.  The giver then gets assurance that the gift goes to a worthy cause.  But I believe that a rational approach to income redistribution needs to consider the giver in much more detail and ask what makes giving a willing thing.  Unlike the Libertarian perspective that conceives of government as Leviathan and taxation as an act of coercion, my view is that government is a necessary construct both to provide public goods and to help us engage our social conscience.  We want to help others less well off than ourselves.  Some of the taxes we pay are how we who are fortunate provide assistance to others who are not doing as well.  This view may seem laughably naïve, but it makes sense to me.  I have tried to give it voice in this piece and to sketch how it might be operationalized. But really, I only meant this to start the conversation.  I hope others will chime in to extend and critique what is here in this post.

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