Obamanomics

Redistribution of income can save America and EU

The idea that governments have a right to tax the rich to pay the poor is as ancient as the idea of equity and of civilisation itself. But that is not the only principle underlying United States President Barack Obama’s plea that the rich in his country must be willing to bear a larger share of the burden of resolving the nation’s debt burden. There are two additional principles underlying his proposal. First, all kinds of income must attract the same rate of taxation at any given level of income. Thus, subsidy offered to the rich through lower taxation of dividend income or zero tax on inherited wealth is an inequity that deserves particular redressal at a time when the government is scraping the bottom of the proverbial barrel in search of funds to reduce public debt. Second, when a nation is in crisis and faces the prospect of its global standing being diminished, and of becoming externally dependent on others, it becomes even more incumbent upon the rich to accept a disproportionate share of the fiscal burden of remedying things. That is the principle that President Obama enunciated and one that any elected government in a democracy ignores at its own peril. America’s rich and super rich have lived a charmed existence for several generations, leading ecologically unsustainable lifestyles that have now become economically unsustainable. It is time they coughed up some of their wealth and President Obama was right to say so.

But it is not just social transfers of income from the rich to the poor that the developed economies need in order to save themselves from the ignominy of debt defaults and worse. The European Union (EU), for example, desperately needs a geographical redistribution of income from taxpayers in its richer member states to people in the poorer member states, to avoid debt default. Europe’s financial situation is grave and could become catastrophic since European governments are unwilling to redistribute incomes away from the richer regions to the poorer ones. Apart from the inter-class and inter-generational transfer proposed by President Obama, what Europe needs is an inter-regional or inter-spatial transfer of income. Germany and France must pay more to help bail Greece and Portugal out. It is like the central government transferring funds from India’s richer states to the poorer ones.

Both the US and EU need such internal redistribution of income for at least two reasons. First, any income transfer by the government, with tax revenues from the rich being used to fund the consumption of the poor, can boost overall consumption (since the marginal propensity to consume of the poor is higher than that of the rich), thereby boosting growth. And second, the revenues thus mobilised can help governments reduce their debt burden and become less dependent on external support and crutches. Rather than looking to China for help, European governments must look to their own rich, people and regions, for additional revenue mobilisation.