Friday, November 16, 2007

To have and have not: Economic growth and wealth distribution

How a flat tax is supposed to narrow the inequality gap is beyond me. The flat tax is an alternative to a progressive income tax, the latter does reduce inequality to some extent. If free markets lessen inequality it is difficult to explain how China has increased income inequality markedly since adopting a market system and integrating into the world economy.
This is the typical sort of ideological claptrap that goes by the name of economics at prestigious universities such as Harvard where Rogoff is a prof.This comes from the following website.

To have and to have not
Fundamental tax reforms and open markets are needed to balance the global distribution of wealth. It doesn't look likely in our lifetime.
Kenneth Rogoff

Lately, I have been trying to explain to my 11-year-old son Gabriel the astronomical differences between people's income.

Microsoft founder Bill Gates first penetrated Gabriel's consciousness a couple of years ago, when his father served as a warm-up act to Gates at a large conference sponsored by the Danish government. Ever since, Gabriel has been fascinated by the seemingly infinite possibilities of having $60bn.

For example, whenever I tell Gabriel that something is unbelievably valuable (even, say, a great painting in a museum), he invariably says, "But Bill Gates could buy it, right?" Yes, Gates could buy the whole museum. But then he would just turn around and give it back so everyone else can see it, so there is no point. Gabriel is not entirely convinced.

Gabriel has decided that if he can't become a professional basketball player when he grows up, then he'd like to buy a team. As an economics professor, I cannot help but ask him if he knows that it costs $300-500m to buy a National Basketball Association team. "But Bill Gates could do it. He could buy all the teams in the league, right?" Yes, I say. But if Bill Gates were to own the entire NBA, how would he decide which team to root for? Gabriel concedes the point, but I can tell that again he is not convinced.

Gates is not the only one who can easily buy teams and paintings. The latest Forbes list of America's wealthiest individuals showed that last year's highest nine earners, whose ranks include New York City's mayor, Michael Bloomberg, managed to increase their wealth by $5-9bn last year. Yes, that is just the annual increase in their wealth. Collectively, their $55bn in earnings outstripped the entire national income of more than 100 countries.

To put these astronomical numbers in perspective, I had Gabriel try to confirm that to be among the top nine earners in the US, you had to pull in at least $150 per second, including time spent eating and sleeping. That is $9,000 per minute, or $540,000 per hour.

How much do America's highest income earners make compared to the world's billion poorest individuals? Well, if the top nine donated their earnings, it would be the equivalent of about three months' income for the bottom billion. (Gabriel knows, of course, that Bill Gates and Warren Buffet have donated tens of billions already.)

As for the other nine months, given that the US accounts for only 25% of world income, it is a fair guess that there are some very wealthy individuals elsewhere who might be able to kick in. (Mexican telephone magnate Carlos Slim, for example, is a close competitor to Gates for the title of the world's richest man.)

Mind you, the idea that the ultra-rich could easily solve poverty is stupefyingly naive. Most serious academic research strongly supports the view that rich countries can best help poor regions like Africa by opening their markets, and by providing assistance in building physical and institutional infrastructures.

The greatest successes in fighting global poverty have come from China and India, two countries that have largely pulled themselves up by their own bootstraps. But this seems too complicated to explain to Gabriel just yet. So I retreat to the simplistic rock star/UN view of how great it would be if we could give more money.

Are massive income and wealth differences an inevitable outcome of fast growth? By and large, the answer from history is "yes". China, whose growth performance since 1970 has now broken every record, is well on its way to having the world's most unequal income distribution. Indeed, China has passed the US and is nearing Latin American levels of inequality.

Policy solutions are not easy. Many super-earners are also super-creative and bring enormous value. Places like the UK actively court wealthy foreign nationals through extraordinary preferential treatment of their investment income. The ultra-rich are an ultra-mobile group, too. If you are earning $540,000 an hour, it does not take too long to save up to buy an apartment, even in London.

Anyway, there are limits to how much tax pressure the political system can apply to the ultra-rich. Consider that any of the top nine American earners make more in two days than leading US presidential candidate Hillary Clinton raises for her campaign in a good quarter of the year.

Rather than punitively taxing wealth, globalisation strengthens the case for shifting to a flat tax on income (or better yet consumption) with a moderately high exemption. Aside from the usual efficiency arguments, it is just going to become increasingly difficult and costly to maintain complex and idiosyncratic national tax arrangements.

Unfortunately, movements towards fundamental tax reform are on the back burner in most countries. One can only hope that our children's generation will grow up to live in a world that does a better job of balancing efficiency and equity than we do. Gabriel says he is going to think about it.

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