Tuesday, September 18, 2012

To achieve the American Dream, you need more redistribution

How redistributive should tax policy be? To some extend this is a matter of preferences, at it depends on what the social objective is. Once the politicians have agreed on this, one can let the economists figure out how to achieve it. Unfortunately, politicians debate about policies instead of objectives, and this leads to much irrational arguing. Now let us be a little utopian: assume there were a discussion about the social objective, and the debate were whether well-being should be measured at the level of the existing individuals or the dynasties (individuals and their descendants). What would be the impact on redistribution?

I think this is who one should frame the latest paper of Alexander Gelber and Matthew Weinzierl. They consider that for economic efficiency, what matters most is earning ability. Not everyone is born with the same ability, and their is a positive but far from perfect correlation of ability across a dynasty's generations. Given that developing a child's abilities requires resources, and low-ability (and thus poor) parents may not have those, redistribution helps in generating a better use of abilities. If the objective does not take into account future generations, then one does not need such redistribution as much. So the question to our politicians is: how much do you care about the future generations? And wasn't the American Dream about giving everyone with the right skill set the opportunity to make it?

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