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Inequality obsession confounds real issues

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After five years of lousy economic performance, you would think people would be sick of it by now. Guess not. How else to explain why we’re having a big fight over inequality instead of arguing over how to jump-start growth?

There’s no denying inequality has increased. Median wages haven’t kept up while families in the upper tax brackets have prospered. But even so, getting the economy back on its typical growth path of 3.4 percent a year should be the overriding imperative.

That would do wonders for the immediate problem of too few jobs and too many jobless — not to mention the problem of lagging incomes and insufficient federal revenue.

Sadly, that’s not the topic du jour.

Prosperity harbors a contradiction. Rapid economic growth requires a relatively high degree of inequality, which is more tolerable when the pie tends to grow for all.

In hard times, those who succeed and enrich themselves draw more envy and the political left amps up its obsession with punishing the rich — expressed in the form of taxes that impair the economy’s potential.

The current inequality obsession has gotten so bad some people think we would be better off running the top tax rate back up to 91 per cent, where it was in the 1950s. Those were prosperous times, they say. Businesses were still created. Investment was healthy. And there was less inequality!

The New York Times’ Paul Krugman gave this a try in a recent column, with the added notion that we would also be better off — less inequality! — if organized labour had the same heft it did in the ‘50s. As a Nobel laureate, he had to know better.

Today, the economy is weak even with relatively low tax rates. Yet Krugman and his fellow travelers say the solution to our woes is a job market dominated by labour monopolies — unions — and a tax rate that gives upper-income investors and business owners virtually no incentive to earn an additional dollar.

Krugman forgot that the 1950s were a unique period in U.S. history. Much of the developed world’s industrial capital was incinerated in war and was still being rebuilt. Of course the American economy prospered. How could it not?

Moreover, as James Pethokoukis of the American Enterprise Institute recently pointed out, jobs were plentiful in those years in part because the post-war boom came at a time when the size of the labour force was reduced, not only by a Depression-era birth dearth but the loss of potential workers killed or wounded in war.

Krugman would profit from reading a recent column by his Times colleague, Eduardo Porter. It includes several passages that were amazing to find in The Times.

A sample: The U.S. tax system is "one of the most progressive" in the developed world. It does "more to redistribute resources and reduce inequality" than tax codes in other countries. But progressive taxes "make it hard to raise money" because they "encourage people to reduce their tax liability rather than to increase their pretax income." And: Hitting top earners with high rates "can discourage work and investment."

Porter was arguing for flatter, European-style taxes like the value-added tax or a carbon tax — levies few people can avoid, which produce revenue like gangbusters. Porter doesn’t think Washington does enough to support low-income families compared with big-government social democracies, which rake in much more revenue.

The European debt crisis, however, highlights the flaws in that model.

It’s true we must have more revenue and the Simpson-Bowles plan, once assumed to be a roadmap for the fiscal cliff talks, would have produced more by carving loopholes from the tax code. But it also would have encouraged growth by rolling back the top rates. Forget it: Obama now insists we dispense with the rollback. To heck with growth: He wants to carve out the loopholes and raise the rates.

If he gets his way, the U.S. could face four more years of economic anemia — which means we may someday look back on the Obama years as the Japanese look back on their "lost decade."

E. Thomas McClanahan is a member of the Kansas City Star editorial board.

—McClatchy Tribune Services

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