In December, the Organization for Economic Cooperation and Development (OECD) published a report entitled Trends in Income Inequality and its Impact on Economic Growth, which postulates that redistributive tax policies are necessary to ensure long-term economic growth.
The OECD researchers who authored the report reviewed data from each OECD member country over the past 30 years, and found that high income inequality within any given country had a negative impact on its overall economic growth. In particular, the researchers found that a large gap between low-income earners and the rest of the country's workers was even more strongly associated with slower growth. They follow with a recommendation based on those findings:
"[P]olicies to reduce income inequalities should not only be pursued to improve social outcomes but also to sustain long-term growth. Redistribution policies via taxes and transfers are a key tool to ensure the benefits of growth are more broadly distributed and the results suggest they need not be expected to undermine growth. But it is also important to promote equality of opportunity in access to and quality of education. This implies a focus on families with children and youths – as this is when decisions about human capital accumulation are made -- promoting employment for disadvantaged groups through active labour market policies, childcare supports and in-work benefits."
A few thoughts come to mind regarding the study's findings and recommendations.
First: the OECD's proposals are not new.
Last year, OECD released its biannual analysis of the United States economy along with a laundry list of policy recommendations based on the findings. NTU Foundation analyzed each of those proposals and found that they would, on net, cost $70 billion per year if enacted.
The OECD recommended positive tax reform measures like lower corporate rates, simplifying the current income tax system, and even comprehensive reform. However, it also explicitly advocated for a more "redistributive" tax system to finance costly proposals like an $8.2 billion pre-school access initiative and a $4.4 billion Earned Income Tax Credit expansion.
The President's State of the Union Address last week made numerous appeals to the idea of an economy in which the wealthy pay their "fair share," which is perhaps not a surprise given many of the proposals in his speech mirrored those in OECD's report (you can read NTUF’s full analysis online.)
Next: redistributive tax policies and government transfers are not the only answers to income inequality.
The study did find that a wide gap between a country's low-income earners and the rest of the population has a statistically significant, negative impact on overall economic growth. However, researchers also acknowledged that "no evidence is found that those with high incomes pulling away from the rest of the population harms growth." To specifically target high-income earners with new and/or higher tax burdens, then, rather than pursue tax reform policies that benefit everyone, seems misguided.
Simplifying tax systems across the board would not only save filers time and money, but would have a positive ripple effect across all income groups by eliminating the enormous deadweight losses associated with complex tax codes. In the U.S., the current system's complexities cost a staggering 6.1 billion hours of time and $224 billion in lost productivity.
The OECD report also fails to mention the benefits that might be realized by lowering payroll or excise taxes, which have a far more immediate impact on the lower class taxpayers for whom they express so much concern. In fact, in its 2014 analysis of the American economy mentioned above, OECD actually recommended increasing the payroll tax – to the tune of $2.2 billion – in order to finance some of its proposals.
The Congressional Budget Office's most recent analysis of the U.S. tax burden shows that the top 20 percent of American taxpayers paid over two-thirds of all federal taxes in 2011. Policymakers should look to broad, system-wide reforms that would benefit many, rather than those that work against only a few.