Inequality: What Can Be Done?

Anthony B. Atkinson

Harvard University Press 2015
A book review by Danny Yee © 2015
Inequality is now a prominent public concern, but distributional issues are still shunned by most economists. In Inequality Atkinson places them centre stage, looking at what economic inequality is and why it matters, making some concrete proposals as to what can be done about it, and responding to the most obvious criticisms of those proposals. Though some of his discussion is general, the context and all the concrete proposals are specific to the United Kingdom, which helps to keep them grounded at the expense of making them less interesting to those elsewhere.

What Can Be Done? is remarkably easy to read, with an approach that avoids almost all technical details (one exception is a few pages on revenue-maximising top tax rates). It is also pragmatic: Atkinson is not after the optimal policy settings in each situation, let alone agreement on what they might be, but is trying to find practical measures which would move us in the right direction.

Atkinson begins with some background, looking at inequality of outcome versus inequality of opportunity, ways of measuring income dispersion, measuring consumption as an alternative to income, and so forth. Then comes a historical overview, focused on the United Kingdom and the United States but with some international comparisons, focusing on falling inequality in the post-war decades and likely explanations for that. And he touches on various aspects of the economics of inequality: technology, labour markets, capital and monopoly power, and the connection between individuals and macroeconomic aggregates.

Then come the proposals. Atkinson argues that the direction of technological change is not entirely exogenous, but subject to policy control to at least some extent:

"Proposal 1: The direction of technological change should be an explicit concern of policy-makers, encouraging innovation in a form that increases the employability of workers and emphasizes the human dimension of service provision."

Similarly, competition policy can and should concern itself with distributional issues. And there is a need for a countervailing power against corporate dominance: the market "balance of power is weighted against consumers and workers":

"Proposal 2: Public policy should aim at a proper balance of power among stakeholders, and to this end should (a) introduce an explicitly distributional dimension into competition policy; (b) ensure a legal framework that allows trade unions to represent workers on level terms; and (c) establish, where it does not already exist, a Social and Economic Council involving the social partners and other nongovernmental bodies."

These are fine in principle, but they (or at least 1 and 2a) seem among the harder of Atkinson's proposals to actually implement in practice. He passes over the problem of how the distributional consequences of (say) breaking up Google or building a commercially viable fusion power plant could be known in advance. It seems to me that, even for progressive activists and politicians, concerns other than inequality are likely to dominate in such decisions.

Work is a historical phenomenon and Atkinson argues that the modern assumption or default of "employment" to full-time is increasingly problematic: many people now have "portfolios" of income generating activities, involving part-time employment, self-employment, temporary jobs, and so forth. So "the labour-market goal should be stated, not in terms of maximising employment, but in terms of minimising involuntary unemployment, where this is measured in a way that reflects the new features of the twenty-first century labour market".

Which leads to two proposals, the first for more direct action on unemployment and guaranteed public employment and the second for a statutory minimum wage augmented by a voluntary company "pay code" constraining spreads between top and bottom.

"Proposal 3: The government should adopt an explicit target for preventing and reducing unemployment and underpin this ambition by offering guaranteed public employment at the minimum wage to those who seek it."
"Proposal 4: There should be a national pay policy, consisting of two elements: a statutory minimum wage set at a living wage, and a code of practice for pay above the minimum, agreed as part of a 'national conversation' involving the Social and Economic Council."

Turning to capital, Atkinson looks at patterns of inheritance, housing wealth, and rates of return; he emphasizes the difference between benefit from and control of capital. His two proposals here seem fairly timid:

"Proposal 5: The government should offer via national savings bonds a guaranteed positive real rate of interest on savings, with a maximum holding per person."
"Proposal 6: There should be a capital endowment (minimum inheritance) paid to all at adulthood."

The suggested sum involved with the second is only on the order of £10,000, so is dwarfed by the handouts currently given to wealthy investors. (A family able to put the full amount into a Child Investment Savings Account each year would receive a larger tax subsidy over 18 years — and the resulting "endowment" would continue to be tax-free for their child.)

Atkinson also proposes the setting up of a sovereign wealth fund:

"Proposal 7: A public Investment Authority should be created, operating a sovereign wealth fund with the aim of building up the net worth of the state by holding investments in companies and property."

Which seems wrongheaded to me. Surely there are always going to be infrastructure projects with better returns than passive investment in property or shares, and foreign asset accumulation only really makes sense if the country is running a current account surplus.

Turning to taxation, Atkinson makes the case for a higher top marginal rate of income tax:

"Proposal 8: We should return to a more progressive rate structure for the personal income tax, with marginal rates of tax increasing by ranges of taxable income, up to a top rate of 65 per cent, accompanied by a broadening of the tax base."

With that broadening involving changing the tax treatment of pension and similar savings. This would be augmented by an earned income discount for low income earners:

"Proposal 9: The government should introduce into the personal income tax an Earned Income Discount, limited to the first band of earnings."

He suggests that the estate tax be abolished, with recipients instead paying a tax on inheritances above a certain lifetime amount:

"Proposal 10: Receipts of inheritance and gifts inter vivos should be taxed under a progressive lifetime capital receipts tax."

And there should be reform of the regressive council tax system introduced by Thatcher (which, as Atkinson points out, was in many ways worse than the proposed poll tax):

"Proposal 11: There should be a proportional, or progressive, property tax based on up-to-date property assessments."

Which would potentially be payable in the form of an equity stake.

As changes to social security, he suggests a universal but taxable child benefit:

"Proposal 12: Child Benefit should be paid for all children at a substantial rate and should be taxed as income."

And one of two proposals for broader social security:

"Proposal 13: A participation income should be introduced at the national level, complementing existing social protection, with the prospect of an EU-wide child basic income."
"Proposal 14: There should be a renewal of social insurance, raising the level of benefits and extending their coverage."

Strangely, at least to my mind, Atkinson comes down in favour of keeping the separate system of National Insurance payments instead of rolling it up into income tax, on the grounds that while it is not hypothecated (ring-fenced) for social security payments people think it is and so accept it.

Atkinson doesn't really address international inequalities, but throws in:

"Proposal 15: Rich countries should raise their target for Official Development Assistance to 1 per cent of Gross National Income."

As well as these proposals, Atkinson fields a few "ideas to pursue": including "a thoroughgoing review of the access of households to the credit market for borrowing not secured on housing", an annual wealth tax, changes to the taxation of pensions, a global tax regime, and a minimum corporation tax.

Atkinson then addresses three of the more obvious criticisms of these proposals. The first is that these measures may reduce inequality, but only at the expense of "shrinking the size of the cake" by reducing output or slowing growth. This is a possible problem, but "the a priori view that there is an inevitable conflict between equity and efficiency is not borne out by an examination of the underlying assumptions". The second is that globalisation prevents action in this area by any one nation. There are international constraints on individual countries, but they do have choices and "are themselves partly responsible for the terms on which they engage with the world economy". And the third is that the measures proposed are unaffordable. This is addressed by attempting to construct a revenue-neutral implementation of the proposals.

Inequality is practical and pragmatic, if not actually rather staid or even dull. It's hard to see it mobilising the masses: no one is going to go to the barricades for a 65% top marginal tax rate, let alone the creation of "a Social and Economic Council involving the social partners". Viewing this more positively, none of Atkinson's proposals would require revolutionary change and in the United Kingdom his program is just possibly within the scope of a left-moving Labour Party. Few will agree with all Atkinson's proposals, but he has provided a useful reference point for exploring the options available.

October 2015

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%T Inequality: What Can Be Done?
%A Atkinson, Anthony B.
%I Harvard University Press
%D 2015
%O hardcover, notes, bibliography, index
%G ISBN-13 9780674504769
%P 384pp