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OECD shows how to fight inequality and boost growth at the same time

January 23, 2012
by Patrick Love

Join the dots and get a fright

If your sovereign debt was soaring and you were locked into a costly war, what would you do if, for various reasons, default and surrender had to be excluded from the policy package? Raise taxes and cut public services? But imagine there are practically no public services anyway and you’ve got as much as you can expect from taxes. Well, you could invent a temporary tax to be applied until things get better.

That’s what British prime minister William Pitt did in 1798 when he announced certain “duties on income” to be gathered starting in 1799 to finance the war against Napoleon, inspired perhaps by the eisphora, a temporary tax on capital to finance wars used by Athens and other Greek cities from around 430 BCE on.

Income tax, as it came to be known, was abolished briefly during a lull in the fighting, and again following Napoleon’s final defeat at Waterloo, when Parliament decided that all documents connected with it should be collected, cut into pieces and pulped, although duplicates had already been sent to the King’s Remembrancer. (By the way, I got these details from what must be one of the most unlikely celebration sites on the web: Her Majesty’s Revenue & Customs Bicentenary of Income Tax  page.)

The tax was soon back, joining the excise duties and other taxes that still form the basis of government income. What should this money be used for? The day to day running of the country obviously, but new OECD research as part of the Going for Growth programme argues that “countries should fight rising inequality with policies that simultaneously curb the income gap between rich and poor while boosting economic growth.” 

The World Economic Forum is worried about inequality too. Its annual survey of global risks warns about economic imbalances and social inequality, with respondents afraid that “further economic shocks and social upheaval could roll back the progress globalization has brought”.

The OECD policy mix focuses on tax, labour markets and education. The reduction or elimination of “welfare for the well-off” – tax breaks that primarily benefit the rich would create space for growth-friendly reductions in taxes for all taxpayers.

Reducing the gap in employment protection between temporary workers and those on permanent contracts would reduce the average 25% wage differential between these two types of employees while boosting employment and growth. Provision of more affordable child care would similarly improve labour force participation rates and incomes for women.

Improving educational outcomes, particularly for immigrants and socio-economically disadvantaged populations, would have long-term impacts on their employment opportunities, incomes and inequality.

The OECD report also points out that some reforms imply tradeoffs, for instance shifting taxes from labour to consumption might improve incentives to work, save and invest, but would raise inequality.

Useful links

OECD work on new sources of growth

Going for Growth will be released in March. In the meantime, you can download these:

Under shock: How to spread macroeconomic risks more fairly

Risk sharing

Reducing income inequality while boosting economic growth

Less income inequality and more growth – Are they compatible?

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