Megan McArdle expressed skepticism in her June 16 Wednesday Opinion column, “Raising taxes on the wealthy won’t magically fix inequality,” that we can fix inequality by increasing income or wealth taxes on the rich. Her main argument was that because rich people spend their marginal income on luxury goods such as fancy cars and yachts, taxing them more will not increase the supply of necessities for others to consume; it will merely redistribute fancy cars and yachts to slightly less wealthy people.
This argument might be correct if the basket of goods and services produced by the economy were fixed, but it is fallacious once we recognize that shifting the income distribution would also shift the composition of production. If the rich spend less and everyone else spends more, the economy will produce fewer luxury goods but more food and health care. Progressive taxation of income or wealth can indeed reduce inequality — and probably better so than taxing consumption, which is inherently regressive because the rich save a higher share of their income than everyone else.
John Shea, Ellicott City
The writer was deputy assistant secretary at the Treasury Department’s Office of Economic Policy from 2010 to 2011.
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June 22, 2021 at 04:33AM
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