Until recently, economists have not paid much attention to inequality. The mainstream view was most notoriously stated by Robert Lucas (2004): “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”
But with inequality reaching seemingly unacceptable levels and the negative effects of inequality becoming more visible, this view seems to have been misguided. Rather, it seems that as long as capitalists used their surplus income not to consume but to invest, the social contract held (Milanovic, 2019). Today’s developments, however, suggest that the social contract no longer holds.
New research discusses a variety of tools to combat inequality. Yet, which policy to choose in the fight against inequality may depend on the drivers underlying the dynamics of inequality.
This is a list of policy tools that have been suggested as remedies against rising by becoming part of a possible new paradigm:
- Global Wealth Tax: A wealth tax is potentially a very effective tool in the fight against wealth inequality. Economists such as Saez and Zucman (2019) have argued for a high wealth tax in the US. However, because many wealthy households hold part of their portfolios and bonds in offshore locations and tax havens, a thorough assessment on what to tax might be difficult. In addition, wealthy individuals might relocate their residence to countries with low or no wealth or income taxes. Other economists have therefore proposed a more ambitious plan of a global wealth tax (Piketty, 2014).
- High inheritance tax: Renowned personalities such as Steve Jobs or Bill Gates are the incarnation of the American Dream. Yet, the story that any person can rise to the wealthiest 1% through their own efforts is less true today than 40 years ago. Instead, wealth is often passed on to the next generation of one’s family. Because the rate of return on capital seems to be higher than the growth rate in the economy, the wealth of these households may be increasing without any income actually generated from their own labor (Piketty, 2014). For this and other reasons, some economists have argued in favor of an inheritance tax to combat wealth inequality (Atkinson, 2015).
- Expand employee stock ownership plans: Some economists have argued that workers should be compensated through mechanisms such as stock ownership plans. The idea behind such policies is that workers become the owners of the companies in which they work. It is hoped that this would help to deconcentrate capital ownership. This may be particularly relevant for Germany, where buying stocks is not very common among the average population because it is usually confined to a small group at the top of the income and wealth distribution (Milanovic, 2017).
- Sanctions against non-cooperative tax havens: One reason why the top 1% today pay a lower tax rate than the bottom 50% is that they can employ services from the financial industry which help them move parts of their portfolio to offshore locations and tax havens. Some economists have therefore argued that governments should impose sanctions on intermediaries or countries that facilitate tax evasion (Zucman, 2018).
- Net wealth tax: Whereas in 1990, twelve OECD countries levied taxes on individual net wealth, in 2017 only four countries still had a net wealth tax. Today, there is renewed interest in wealth taxation among politicians. In the US, Elizabeth Warren and Bernie Sanders have each put forward proposals for a wealth tax. The concept of a net wealth tax has received support from UC Berkley economists Emmanuel Saez and Gabriel Zucman (2019). Others, however, have argued that from both an equity and efficiency perspective, there are limited arguments for having a net wealth tax and that other taxes such as an inheritance tax, a capital income tax or a gift tax would be more effective(OECD, 2018).
- Investment in education: Some economists have argued that we cannot rely on taxes to always compensate the market-driven process of increasing wealth inequality. In order to achieve equal opportunities, Marcel Fratzscher from DIW Berlin has argued in his basic research paper for the Forum New Economy that it will be necessary to invest more in education (Fratzscher, 2016).
- Land tax: The classical economist David Ricardo (1817) famously argued that in the long run, landlords disproportionally profit from economic growth. Since land is a fixed factor and highly unequally distributed across the population, market-based systems tend to produce inequality. Land-value taxation may thus be an adequate policy tool. Indeed, the idea of taxing land has a long tradition in the US, going back to the famous political economist Henry George (1879). In modern times, there has also been renewed advocacy among Europeans, such as Financial Times journalist Martin Wolf, for the introduction or increase in land taxation (Wolf, 2006).
This knowledge base tries to summarize the broad lines of the paradigm debate for a broader public. The goal is to continuously expand and improve the knowledge base as it becomes progressively clearer what a new paradigm could consist of.