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a blog from young economists at Nova SBE

Inequality on the Verge of the (Fiscal) Cliff

The fiscal cliff in the US is the hot topic in any newspaper these days mostly due to the harmful impact it will have on both the American and Global Economies if not prevented. In this article I do not intend to discuss the economic consequences of such an event but rather the roots of the political gridlock that lead to it in the first place.

The quarrel over the Bush-era tax cuts for the wealthiest 1% of Americans is undeniably the issue that triggered the whole problem. In other words, one could claim that the performance of the Global Economy in the near future depends first and foremost on a debate concerning income redistribution and most importantly equality.

The Republican´s who support the tax cuts should be extended base their argument on the role that income plays in the development of incentives and arguing that the government does a poor job managing tax-payers´ money. In their view, a CEO of a big corporation being paid some million dollars per year will put less effort and devotion in his job if the government decides to increase the tax on his income by say 10%. In addition to this, it is their view that the money taxed by the Government could be better employed by the tax payers in profitable investments rather than being wasted in inefficient government programs.

From my point of view both arguments are fundamentally flawed. To present my counterargument I will make my own the words of John Roemer in the article “Ideological and Political Roots of American Inequality”. To begin with, despite the fact that “material incentives” are a relevant factor for most people they are certainly overvalued in what concerns the wealthiest or more capable individuals in a society. As Roemer points out, an individual pursues more than “material rewards” in his life, the recognition of his peers, power or fulfillment are as important in particular for this type of person. What is more, using a purely economic argument, if one believes that the utility brought by income is decreasing at the margin then it makes total sense to tax these individuals more heavily than the ones making few hundred bucks per month without a significant loss of economic efficiency.

            Regarding the inefficiency of the government my argument has two dimensions, one related to the role of public investment and other related to its role in tackling poverty and inequality. In relation to the first dimension, I recognize that there is certainly waste in the public sector, however it does certainly exit in the private sector as well and in some cases in a larger extent. Furthermore, some types of essential investments can only be done by the government, the current state of deterioration of public infrastructure in the US speak for itself. Concerning the second dimension, it is my belief that Ronald Dworkin was completely right in pointing out that an individual should be “held responsible” for his choices but not for his resources, this is the family in which one is born, the genetic characteristics one is endowed with or any other factor that depends on luck. If one believes this, the role of income redistribution is inalienable. From this point of view, it is unacceptable that a policymaker would rather cut on programs which play a vital role in the equalization of resources, like the Medicaid and Medicare in the US, than increase taxes for the wealthiest individuals of a society.

            I do not doubt that by the end of the year the political forces in the US will achieve a consensus to avoid the fiscal cliff. In what concerns the performance of the global economy the way this stalemate is solved is irrelevant, however for the average American and for the role that the state has to play in any developed democracy it will be at the very least a defining moment.

João Morgado


Roemer, John 2011. Ideological and Political Roots of American Inequality


Author: studentnovasbe

Master student in Nova Sbe

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