INEQUALITY | Best Addressed by Spending, Not Tax Policy

Ed Kleinbard, USC

Prof. Edward Kleinbard of USC has a new book, We Are Better Than This: How Government Should Spend Our Money.

It starts with OECD data and prior studies to compare national data on inequality. His summary is that the U.S. record is “Dismal”.

He then demonstrates how government can enhance what Adam Smith called "the happiness of society" – via  investments and social insurance.

He favors extending the system now under assault from the current majority leadership in Congress.

He thinks that efforts to make the Federal income tax more progressive ("Soak the Rich") are futile.

Here are Kleinbard's main points:

• Seeing inequality as a tax issue leads to "misframing our policy debates". 
• The positive returns to government investment in human capital, in infrastructure and in pure science are "enormous" and social insurance addresses the "inescapable role of brute luck in our outcomes".
• Spending wisely grows the economic pie. 
• Preoccupation with the progressive income tax is self-limiting and self-defeating, because very high top marginal rates incur real efficiency costs.
• Political wars that ensue from very high top rates exhaust public energy and attention.
• Better to focus on the progressively of the overall Federal budget, taxation and spending. 

Bottom Line: Not particularly progressive tax systems can fund very progressive overall fiscal systems. To address income inequality, a larger revenue base is more important than the progressivity of the tax structure. His main thesis is outlined in an October 2014 op-ed in The New York Times. Prof. Kleinbard has also published an essay on the "real" Adam Smith values in Commonweal Magazine.