0.4 Income distribution  (Page 7/18)

In the U.S. and Europe it is true that some income redistribution has been accomplished by using the tax side of the government budget. In the U.S. in 2010, for example, the top 1% of the income distribution paid 38% of all federal taxes collected with top rates of income tax only half as high as in 1970. In 2013-14 the share of the top 1% in payment of income taxes in Britain was, but 28%, considerably lower than in the U.S. However this proportion was only 11% in 1979, according to the Institute for Fiscal Studies. Source______________A Survey of the U.K. Tax System, Institute for Fiscal Studies, November 2014. Most developing countries before the eighties vainly tried to enforce progressive tax rates that topped out at 60-70%. See Richard M. Bird&Eric M. Zolt, (2005), “Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries”, Tax Law Review , 52. Taxes on the income rates reached 95% in Sweden in the 1980s. Steeply progressive rates have in practice been accompanied by preferential exemptions for favored industries and groups that have the usually unintended effect of primarily benefitting the wealthy (See Chapter___). The very high rates also induce widespread tax avoidance and evasion. The net result has been relatively little effect on income redistribution, but significantly negative effects on incentives to save, to work, to take risks, and on tax revenues themselves.

Also, a major factor contributing to income inequality is having a lot of people with zero incomes (i.e. unemployed).

Denmark has enjoyed the most success in reducing unemployment in Europe is Denmark. At the same time, Denmark has the lowest level of income inequality, not only in the European Union, but almost anywhere else.

Aside from Denmark developed nations with low inequality are other Nordic countries such as Norway and Finland. Norway in 2012 had only a 3% rate of unemployment (1% in some regions). This compared to rates to well over 10% in most other European nations. Rates of youth unemployment in 2013 were especially high in Greece (40%), Italy (39%) and Spain 51%. And it should be noted that the Scandinavian countries have sharply reduced income tax rates over the past 25 years.

Why has recent employment growth been strong in Scandinavian countries? Largely because the Danes, the Finns, the Swedes and the other Nordic nations provide the best education K-12 in Europe. Their education systems yields graduates qualified for jobs of the 21st century.

It is not because Denmark and Sweden spend the most money per student? That title belongs to the U.S., where per pupil spending is 1½ times that in Europe. It is because Nordic education is of very high quality for other reasons. It yields much higher literacy and numeracy levels then in France, England, and Italy education. They spend on education more efficiently, select teachers carefully, and train their teachers much more effectively, and they pay them well.

The piketty proposals in perspective

In spite of the lack of evidence that using the tax side of the budget helps to materially decrease income inequality over time, some economists and policymakers remain convinced that the best path to redistributing income from rich to poor is to sharply increase tax rates on the wealthy, to “level down” the income distribution.