Can Inequality Be Reduced?

What are the realistic options to tackle the scourge of crass inequality in rich welfare states?

Taxing the high-income earners

How about higher taxation, especially of incomes from capital? Globalization makes increased taxation of one of the most significant contributors to inequality — very difficult.

It may be conceivable only with a fully coordinated action from most advanced countries — but that does not seem even remotely possible today.

Two factors are at work here: First, the cross-country mobility of capital makes it very difficult to tax. Second, the countries that benefit from this regime have no incentive to help those who lose.

.. A stunning 66 out 100 of “most wanted” persons accused of economic crimes by the Chinese government are thought to hide in the United States and Canada. Likewise, London brokers are all too eager to accept Russian money, regardless of its origin.

.. Even high-income earners are becoming more difficult to tax. These individuals can easily move from one country to another. There are no obvious reasons why a top executive may not be able to do his job in low tax Singapore or Hong Kong — rather than in higher-tax London or New York.

.. Those who are not as mobile as the top earners perhaps feel that they are taxed enough. More likely, citizens have lost the trust that the government will use their moneys wisely. Skepticism about government probity and efficiency is much greater today than a half-century ago.

.. This means that the only promising avenue to reduce inequality is interventions that are undertaken before taxes and transfers kick in.

These include a reduction in the inequality of endowments, especially inequality in education and the ownership of assets.

Once such endowments are less unequally distributed, market incomes (i.e. incomes before taxes and transfers) will also be distributed much more equally than they are today.