Follow U.S. Investment Immigration and U.S. Economy: According to a report by Reference News on February 18 [Article from the Financial Times website, February 16] Title: The U.S. risks becoming a Downton Abbey economy (Author: Lawrence Summers, Harvard University Professor and former U.S. Treasury Secretary)
Inequality must be addressed. The free market must play a central role. In the United States and elsewhere, inequality has become a major issue. A generation ago, it might have been reasonable to assert that the overall growth rate of the economy was the primary driver of middle-class income growth and progress in poverty reduction. Today, that assertion is no longer reasonable.
The share of national income going to the top 1% of earners has increased dramatically. An increasing share of output is going to profits. Real wages have stagnated. Household income growth has not kept pace with productivity growth. The cumulative effect of all these developments is that the United States is likely already on the path to becoming a Downton Abbey economy. And these problems are likely to persist long after cyclical conditions have normalized and budget deficits have finally been resolved.
To be sure, the number of highly paid individuals in the financial sector has increased significantly over the past generation. Identifying policies to mitigate inequality is not enough. To be effective, the incomes of the middle class and the poor must also be increased. Tax reform can play a major role. The current tax code is poorly designed and is therefore likely to have the effect of slowing economic growth. It also allows the wealthy to exempt a higher proportion of their income from taxation compared to the poor. For example, the stock market rally last year showed an increase in wealth of about $6 trillion, the vast majority of which fell into the pockets of the wealthiest individuals.
The portion received by the government is unlikely to reach 10% of this figure. This is due to a series of policies that favor the wealthy, such as capital gains tax exemptions, the ability to defer taxes on unrealized capital gains, and the complete lack of taxation on inherited gains. Similarly, the corporate tax system allows value to leak out as if through a sieve. The ratio of corporate taxes to the market capitalization of large U.S. companies has fallen to a record low. With careful planning, estate taxes can be avoided more or less entirely.
If the loopholes that only the wealthy can enjoy are closed, other tax burdens could be reduced. Increases in income for the poor and middle class from measures such as income tax credits could exceed the losses they cause to the Treasury, as these measures provide incentives for people to work hard and save.
Ironically, those who claim the greatest enthusiasm for market forces are the most indifferent to limiting the tax benefits enjoyed by the wealthy. The problem of inequality must be solved sooner or later. The best way to do this is by letting the free market work, and then striving to improve the outcomes.
