The bottom line is that the combined direct and indirect effects of redistribution -- including the growth effects of the resulting lower inequality -- are on average pro-growth. Another piece of evidence on this question comes from the tax cuts enacted under President George W. Bush. If increasing taxes and redistributing the income lowers growth, then lowering taxes on the wealthy ought to increase growth. However, the evidence does not support this hypothesis: Economic growth did not increase as a result of the tax cuts. Instead, it was quite lackluster in subsequent years. Perhaps tax cuts that allow people to earn, say, $100 million instead of $80 million for an innovative idea -- or vice versa for a tax increase -- dont change incentives that much after all? Economics does not tell us what the distribution of income ought to be. That involves a value judgment, and individuals will differ on what is fair and equitable. But economics can tell us about the consequences of redistribution, and the best evidence we have suggests that modest redistribution, if anything, enhances growth.
Posted on: Fri, 13 Jun 2014 07:10:48 +0000
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