donderdag 3 februari 2011

Spreading the wealth around

Since the well-known discussion between Barack Obama and Joe the Plumber the lively controversy over the need for the government to redistribute income has been renewed. In a very clear analysis, N. Gregory Mankiw states that the single most important difference between the political right and the political left is over the questions of whether, and to what extent, spreading the wealth around is a proper function of government.

Mankiw starts with a brief overview of trends in income inequality in the United States. By all measures, the income distribution has changed radically in the past decennia. The share of income accruing to high income groups has increased dramatically and among them the share of the highest percentiles even more. The leading hypothesis to explain these trends refers to the development that because the growth in the supply of skilled workers has slowed, their wages have grown relative to those of the unskilled. The facts with regard to the distribution of the tax burden, however, make clear that the US does have a progressive tax system. An analysis with the best available data shows that average federal taxes rise steeply with income.

Mankiw then raises the question how the tax system should be designed. The traditional utilitarian approach asks how quickly marginal utility falls as income rises and how much people respond to the disincentive effects of redistributive tax policy. He confronts this with what he calls a Just Desert Theory. This theory admits that questions regarding utility functions and incentive effects may enter into the analysis, but they are the wrong place to start. Rather, we should start by asking whether people’s compensation reflects the contributions they make to society and how much they benefit from government actions.

Read the full address by Mankiw at:

http://www.economics.harvard.edu/files/faculty/40_Spreading%20the%20Wealth%20Around.pdf