Question

A- It is documented that human capital and inherited wealth are highly correlated. How might this influence a redistributive government’s policy action(s)?

B- Summarize three facts from the article ”International Comparisons of Economic Mobility” by Julia B. Isaacs (article provided on the class website).

C-What do you consider to be a fair tax? What are the two main opposing views on this issue? Support your answer with specific arguments or examples.

Answer 1

A. First lets discuss what is a redistributive government. A redistributive government is one which believes in equality and wants to distribute wealth among poorer groups too.
What the question is saying is that it has been proven that human capital (which means skills and qualifications which might be useful in an economic sense) and inherited wealth are highly correlated. In simple terms, it is saying that people who inherit wealth, also have high chance of having skills which will enable them further in economic sense. Isnt it pretty obvious? Rich pepole go to better schools, get better education and grow up in such circles. How would this affect the policy of redistributive government?
What government should do would depend on the following few factors -

1. They not only need to transfer wealth, they also need to transfer human capital.- How does the goverment do that? By enabling getting human capital despite lack of wealth. This means affirmative actions for poor, more scholarships, free schooling, training programs and such.
2. Since human capital grows mostly in early to middle ages (schooling, college, learnings on job) and wealth grows throughout life (wage earnings while working, pensions during retirement), they need to frame the policies accordingly.- This requires that government should focus on human capital early in life. Focus on primary and college education, more funding for schools in poor areas and so on.
3. Human capital and welath are often interchangeable (better learned/people will skills get higher paying jobs). How does the government use that fact?- This means goverment needs to transfer skills to poor people too. So government can link social security benefits with skills learnings. For homeless, free language and skills classes apart from free food and so on.

B. Three factors from the article

1. Most americans (69%) beleive that economic mobility is higher in the United states and that a personc an move upward on economic ladder by his education, skills and hard work.This percentage is highest among the 27 participating countries.
2. Based on the survey and data in the article, this does not seem to be true. American wealth mobility is lower than average, especially in the long run.
3. Welath mobility in US is even smaller in the lower rungs of society-people who are already poor. This relates to part A of our question.

C. A fairtax is a proposal in the US where all other federal taxes (personal and corporate) and also taxes on medicare, gifts etc. and would be replaced by a single retail federal tax of 23%. The two main opposing views on this are the folliowing-

• Support- When people get to keep 100% of their salaries, it will result in increased spending and hence increased GDP and better economy. It will also save government money by abolishing IRS and in general a straight forward tax regime will result in a more efficient ecnomy and output.
• Oppose- It will hurt the poor more as right now they dont pay any or much income tax, which would be then replaced by 23% tax on all their purchases- increasing effective tax payment by them. This will also affect seniors, as they have no earnings. Its unfair to them as they paid taxes all their lives and they will again pay a 23% taxes.

I personally consider the current regime to be fairer as it provides the government with more levers to change the income disparity. For example, government can tax income on the basis of different earning slabs (as an example, people earning less than $30k pay no tax, 30k-50k pay 5% and so on). Government can also tax corporates differently to encourage a particular industry (for example, less taxes for electric cars) or encourage domenstic production etc.