27 May 2014

Piketty’s Arguments Still Hold Up, After Taxes

But there are important issues to consider regarding this critique. First, it’s very strange for conservatives to be complaining that Mr. Piketty fails to account for the inequality-reducing function of taxes and transfers. Whether it’s the House Republican budget, which gets 70 percent of its spending cuts from low-income programs, attacks on social insurance and Obamacare, or the description of the safety net as a hammock that’s preventing the poor from trying harder to earn more income, it is odd to favorably cite the impacts of transfers in the inequality debate while trying to significantly shrink them in the fiscal debate. 
Second, the implications of this critique are politically unsustainable. If the argument is “don’t worry about market outcomes — we’ll fix the inequalities of the primary distribution in the secondary one,” then every year that market inequality goes up, we’ll have to ratchet up the redistribution function. It is theoretically conceivable that a beneficent top 1 percent might be fine with that, but practically speaking, there’s a limit to such an aggressive strategy of income redistribution.