"New theories needed for a new era", say Ravi Kanbur and Joseph Stiglitz, in an article on inequality published for the CEPR here.
I'm not sure why we need new theories when a modicum of common sense applied to Classical Economics does the trick nicely.
What the question really boils down to is can we empirically differentiate between fair inequality and excessive inequality?
In order to answer that question, we must firstly define fair. For something to be efficient, it must maximise wealth and (economic) welfare.
It is therefore axiomatic that for something to be fair it must be also optimally efficient.
This is really just restating a banal utilitarian position. How we measure welfare, which is subjective to each of us, may be problematic, but this has no bearing on the fact that what is fair must also be efficient.
However, applied to (wealth) distribution and Public Finance is where things get interesting.
We know that the taxation of produced factors, Income/Capital is inefficient(deadweight loss) and we know that the value of land capitalised into selling prices is also inefficient(deadweight loss), so;
a fair economic system=fair distribution of Land/Income/Capital=aligned incentives=optimal economic efficiency.
In other words, in a fair and thus efficient economic system, the exact amount of compensation you owe the community(tax) is rental value of land your property occupies (plus some other negative externalities which are of a minor concern here).
Given the ATCOR principle (all taxes come out of rent), to see if we have fair or excessive inequality today we then only need to compare current taxes paid (% of total tax) to rental value of land (% of total land rent) between households.
We accurately know that the top 1% of households in the UK pay around 14% of total taxes or about 18% of domestic taxation.
Less accurately, because the data on the distribution of land by value is sketchier, they own around 40% of all land by rental value. (based on HMRC, Times Rich List, Pareto distribution).
Therefore they are paying less than half of what they would be under a fair and optimally efficient tax system.
Furthermore, as the value of land has risen faster than the returns to labor and capital, its concentration among the wealthiest percentile is the reason why we’ve seen widening and excessive inequality.
The reason Land does capture a greater return of GDP than Labour and Capital, all else being equal, is covered by David Ricardo and his Law of Rent.
No new theories needed. Wasn’t too hard was it?
Debate Magazine
