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Home » Opinion » Foreign Views
Creating new US jobs and closing income gap
By Edward N. Wolff |
February 2, 2009, Monday
|
Print Edition
Print Edition
WITH unemployment climbing in the United States and other OECD (Organization for Economic Cooperation and Development) countries, job creation is a key objective for policy makers.
In the US, President Barack Obama recently proposed to increase public spending by about US$600 billion over the next two years to create an additional 4 million jobs.
But Obama is also concerned with reversing a sharp rise in income inequality, which is now at an 80-year high.
Is it possible for leaders to do both at the same time? The answer is unequivocally yes, but only if they focus on government spending rather than reforming their tax systems.
America's tax system has surprisingly little redistributional punch. Using a measure of "comprehensive income" - money income, total capital gains on wealth, imputed rent on owner-occupied housing, non-cash government benefits, and public consumption - income taxes are generally progressive.
Federal income taxes as a proportion of income increase steadily from 2 percent at the 10th percentile (that is, a family ranked 10th from the bottom out of 100) to 14 percent at the 90th percentile. But then it falls off slightly to 13 percent at the very top, reflecting the favorable treatment of capital gains and investment income under the Bush administration's income-tax laws.
On the other hand, Social Security taxes - the biggest tax for more than two-thirds of families - are mildly regressive.
Social Security taxes as a proportion of income rise gradually from 5 percent at the 10th percentile to 9 percent at the 80th percentile, stay there at the 90th percentile, but then fall off sharply to 5 percent at the top. This decline reflects the wage cap on Social Security taxes (currently at US$102,000).
Total personal taxes are mildly progressive, increasing steadily as a share of income from 14 percent at the 10th percentile to 28 percent at the 90th percentile. But then they fall off sharply to 22 percent at the top, owing to the favorable treatment of capital gains and investment income.
On the other hand, total transfers have a much bigger equalizing effect on incomes. Cash transfers, like Social Security and unemployment insurance, are highly equalizing. When the value of non-cash government benefits, like Medicaid, Medicare, and food stamps, are also included, total transfers become extremely progressive.
Government spending on goods and services, like education, highways, police, and sanitation, has distributional consequences, too.
Public consumption is just as progressive as transfer payments. As a proportion of income, it declines almost continuously, from 34 percent at the 10th percentile to 3 percent at the very top. The main beneficiaries of public spending are the poor and the middle class.
When you add together government transfers and public consumption and subtract taxes paid, you get a figure for net government expenditures.
This is extremely progressive. As a share of income, it declines sharply from 70 percent at the 10th percentile to -16 percent at the top (in other words, the top bracket pays more in taxes than it receives in government benefits).
The extremely progressive nature of net government expenditures comes about equally from government transfers and public spending; very little is contributed by taxes.
It is not just the poor who benefit from net governmental expenditures. The middle class is also a big beneficiary.
As Obama and other leaders around the world implement stimulus packages in the months ahead, they should recognize that the question of who benefits goes beyond the number of jobs created.
If these packages target education (very redistributive) or sanitation, fire, police, and highways (mildly redistributive), they can create jobs and reduce inequality.
(The author is professor of economics at New York University. Copyright: Project Syndicate, 2009. www.project-syndicate.org. The views are his own.)
In the US, President Barack Obama recently proposed to increase public spending by about US$600 billion over the next two years to create an additional 4 million jobs.
But Obama is also concerned with reversing a sharp rise in income inequality, which is now at an 80-year high.
Is it possible for leaders to do both at the same time? The answer is unequivocally yes, but only if they focus on government spending rather than reforming their tax systems.
America's tax system has surprisingly little redistributional punch. Using a measure of "comprehensive income" - money income, total capital gains on wealth, imputed rent on owner-occupied housing, non-cash government benefits, and public consumption - income taxes are generally progressive.
Federal income taxes as a proportion of income increase steadily from 2 percent at the 10th percentile (that is, a family ranked 10th from the bottom out of 100) to 14 percent at the 90th percentile. But then it falls off slightly to 13 percent at the very top, reflecting the favorable treatment of capital gains and investment income under the Bush administration's income-tax laws.
On the other hand, Social Security taxes - the biggest tax for more than two-thirds of families - are mildly regressive.
Social Security taxes as a proportion of income rise gradually from 5 percent at the 10th percentile to 9 percent at the 80th percentile, stay there at the 90th percentile, but then fall off sharply to 5 percent at the top. This decline reflects the wage cap on Social Security taxes (currently at US$102,000).
Total personal taxes are mildly progressive, increasing steadily as a share of income from 14 percent at the 10th percentile to 28 percent at the 90th percentile. But then they fall off sharply to 22 percent at the top, owing to the favorable treatment of capital gains and investment income.
On the other hand, total transfers have a much bigger equalizing effect on incomes. Cash transfers, like Social Security and unemployment insurance, are highly equalizing. When the value of non-cash government benefits, like Medicaid, Medicare, and food stamps, are also included, total transfers become extremely progressive.
Government spending on goods and services, like education, highways, police, and sanitation, has distributional consequences, too.
Public consumption is just as progressive as transfer payments. As a proportion of income, it declines almost continuously, from 34 percent at the 10th percentile to 3 percent at the very top. The main beneficiaries of public spending are the poor and the middle class.
When you add together government transfers and public consumption and subtract taxes paid, you get a figure for net government expenditures.
This is extremely progressive. As a share of income, it declines sharply from 70 percent at the 10th percentile to -16 percent at the top (in other words, the top bracket pays more in taxes than it receives in government benefits).
The extremely progressive nature of net government expenditures comes about equally from government transfers and public spending; very little is contributed by taxes.
It is not just the poor who benefit from net governmental expenditures. The middle class is also a big beneficiary.
As Obama and other leaders around the world implement stimulus packages in the months ahead, they should recognize that the question of who benefits goes beyond the number of jobs created.
If these packages target education (very redistributive) or sanitation, fire, police, and highways (mildly redistributive), they can create jobs and reduce inequality.
(The author is professor of economics at New York University. Copyright: Project Syndicate, 2009. www.project-syndicate.org. The views are his own.)
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