Do the rich pay enough tax? | The Economist

Key Concepts

• Redistribution: The transfer of income or wealth from some individuals or groups to others, typically through government policies like taxation and social welfare programs.
• Gini Index: A statistical measure of income inequality, ranging from 0 (perfect equality) to 1 (perfect inequality).
• Market Income: Income earned from wages, salaries, investments, and other market activities before government intervention.
• Progressive Taxation: A tax system where higher earners pay a larger percentage of their income in taxes.
• Neoliberalism: A political-economic philosophy emphasizing deregulation, privatization, and reduced government spending.

Challenging the Narrative of Welfare State Rollback

The video challenges the widely held belief that the late 20th and early 21st centuries witnessed a significant rollback of the welfare state and a move towards smaller government, exemplified by “Thatcherism and Reaganism.” The central argument is that, contrary to this narrative, redistribution has actually increased in both the United States and the rest of the developed world.

Redistribution in the United States: Increasing Government Transfers

Specifically, the video presents data demonstrating a substantial increase in government transfers to the bottom fifth of earners in the United States. In 1979, this group received 32% of their market income through government transfers. By the latest figures from the Congressional Budget Office (CBO), this figure has risen to 72%. This indicates a significant expansion of the social safety net and a greater reliance on government support for lower-income individuals. Furthermore, the top 1% now pay a higher average rate of federal income tax than they did in 1979, although not the highest rate historically.

Inequality Trends: Before and After Redistribution

Acknowledging the counterargument that inequality has risen, the video utilizes CBO data and the Gini index to illustrate the impact of redistribution. The data shows a consistent upward trend in inequality before taxes and transfers (represented by a dark red line). However, after taxes and transfers are accounted for (represented by a pink line), the increase in inequality is significantly flattened. The data suggests that redistribution in the US has effectively mitigated the rise in pre-tax and transfer inequality, potentially quite successfully.

Global Trends: Redistribution and Falling Inequality

The trend of increased redistribution extends beyond the United States. In the rest of the rich world, particularly since 1990, inequality after tax and transfers has generally decreased. This effect is particularly pronounced in Europe and, notably, in Britain.

The British Case Study: Progressive Taxation and Income Growth

The video highlights the UK as a compelling case study. A chart illustrating income growth across different positions in the income distribution (10th, 25th, 50th, 75th, and 90th percentiles) reveals that income growth slows considerably as one moves up the income scale. This is attributed to the increasing progressivity of British income taxes and the resulting increase in redistribution. Remarkably, inequality in the UK, measured after taxes and transfers, is now lower than it was in 1986, directly contradicting the common perception of continually rising inequality.

Synthesis: A Shift in Government Role

The video concludes that governments are demonstrably engaging in more redistribution than in the past. While the US is primarily using redistribution to offset rising inequality, European nations, and specifically Britain, are actively reducing inequality through increased government intervention and progressive taxation. As stated, “America is sort of offsetting rising inequality. In Europe it’s swinging the pendulum the other way and you’ve got falling inequality in many places.” This challenges the dominant narrative of a shrinking welfare state and suggests a more nuanced reality of evolving government roles in income distribution.