Last week, the Organization for Economic Cooperation and Development issued a report on inequality and economic growth. The OECD, based in Paris, is the official think tank for rich countries. Its analysis concluded that the income gap between the poor and the middle class contributes to declining economic growth. The United Kingdom and the United States lost 6 percentage points to 9 percentage points of gross domestic product growth over the last two decades because of rising inequality, the report suggested.
OECD economist Federico Cingano also argued that “[r]edistribution policies via taxes and transfers are a key tool to ensure the benefits of growth are more broadly distributed.” Despite such recommendations, survey data from around the world show people are suspicious of taxes as a tool for greater equality. There’s good reason for skepticism: Existing tax and transfer systems across much of the developing world, in particular, have failed to take a dent out of inequality. If governments are going to help reduce the gap between rich and poor people and spur faster income growth for all, it isn’t just about raising more taxes, but raising the right kind of taxes and spending the proceeds well.