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Tax Reform 'Best Way To Tackle US Income Inequality'

by Mike Godfrey,, Washington

15 January 2014

In an op-ed in the Washington Post, Glenn Hubbard, Dean of Columbia Business School and the former chairman of the Council of Economic Advisers to president George W. Bush, has argued that tax reform is the best way to tackle income inequality in the United States, not welfare expansion.

While acknowledging that measures to combat income inequality in the US are necessary, he commented that President Barack Obama's "nod to raising the minimum wage and transfer payments offers little hope for the success he seeks. The heated arguments for these moves miss the critical step toward reducing income disparities: economic inclusion, the ability to work and earn in the economy. Bold action is needed – and is best taken through tax reform rather than an expansion of the welfare state."

"The discussion and policies to be considered," he added, "should look different from those in the present debate. The Obama Administration has supported raising taxes on high-income earners and corporations to pay for expanded benefits to low-income Americans. Such an approach is unlikely to raise labor demand or labor-market earnings for those or other workers."

However, he also pointed out that the opposing view, which centers on classic tax reform of "broaden the base, lower the rates," will "increase capital accumulation, economic growth and employment. But it is insufficient for increasing the inclusion of low-wage workers, whose incomes may not benefit fully from economic growth."

Hubbard looked at two tax reforms in the context of income inequality – a simplification and expansion of education-related deductions (for example, a voucher for low-income individuals for education, training, tuition or their children's education) and an improvement of the earned-income tax credit (by increasing the credit for childless workers to an amount closer to that for families with children) – "would augment the direct work incentive and help counter poverty among the working poor."

He emphasized, however, that "greater support for inclusion through training and worker or employment subsidies must be financed. Options include a consumption-based tax reform to substitute for payroll taxes, high marginal tax rates on wages and/or progressive reductions in the growth of Social Security and Medicare benefits."

TAGS: individuals | tax | training | payroll | tax credits | education | United States | tax reform | individual income tax

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