November 17, 2014
Steve Rattner gets many things right in his NYT column on income inequality. (Okay, I’m going soft because he used a chart from CEPR on mandated vacation.) But there is one point worth correcting.
His charts showing income inequality before taxes and transfers across countries is misleading. The OECD counts government run pension programs like Social Security as a transfer. Most other countries have much more generous public pension programs than the United States. As a result, many retired workers in these countries have no income except their government pension. They also pay more in “taxes” for their benefits.
This makes before-tax income seem much more unequal than would be the case if we treated the pensions as being privately run. That implied redistribution is then very large, even if the pension program is only modestly redistributive (i.e. workers’ benefits reflect what they paid into the program).
Btw, inequality really is not hard. If we free trade for the services of doctors and other highly paid professionals, a more efficient mechanism than patent monopolies for developing prescription drugs, and taxed the financial sector like other sectors, we could undo most of the increase in inequality over the last three decades.
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