Everyone hates paying taxes. But many wrongly think that taxes are primarily about redistributing income from the rich to the poor with the state acting like an erstwhile Robin Hood.
In fact, most of what government does is transfer income over our own lives – taxing us when we are working adults and supporting us when we are young and old. A clever child cannot go to the bank and ask for a loan to pay for schooling, promising to repay when they eventually get a job. Instead, the government acts as a “piggy bank,” investing in that child’s education with the promise that they will earn more as an adult and contribute to society later through their taxes.
Many have benefited from this piggy bank – think of the GI Bill or tax breaks for funding college or retirement.
So much of the current debate in the U.S. about President Biden’s economic proposals is cast in this wrongheaded Robin Hood redistribution mentality. Some rich people don’t want to pay more tax because they see it as funding unproductive government spending that goes to those who are undeserving.
In fact, much of what is being proposed is about investment in future capability – infrastructure, education, healthcare, and support for deprived communities – that will equalize opportunities and make the U.S. more productive.
The taxes required to finance this growth in capability is not spending, but investment in the future. Economists call such spending “pre-distribution” because it enables people to earn incomes through the market that make it no longer necessary to redistribute income later.
Take, for example, the proposed investment in universal access to preschool. Research shows that those early years are the most important for brain development and the ability to learn throughout life. If children do not get good nutrition and mental stimulation in those first few years of life, they will never catch up, no matter how good a school you send them to. But low-cost preschool programs can have huge effects. Children from disadvantaged families in Chicago who participated earned more as adults 25 years later, and they were far less likely to engage in criminal behavior and substance abuse.
Investing in children born into poor families today reduces the need for spending on welfare and prisons later. It is also the most cost-efficient way to address inequality and social mobility.
And there are wider benefits to the economy from enabling those children to use their talents. In the U.S., children born into poor families or poor communities are about 10 times less likely to be an inventor, even if they have the exact same math and science capabilities as others. Equalizing opportunities for these “lost Einsteins” could quadruple the rate of innovation in the U.S. economy.
As our societies age, we will need younger generations to be highly productive if they are to afford the rising costs of our healthcare and Social Security. Generous pre-distribution policies today will help them invent, produce and contribute through taxation when they are adults.
Universal basic income is both inefficient and essentially give up on some people having anything to contribute to society.
The same arguments can be made about proposed infrastructure investments which make business more efficient and open up new opportunities, especially in deprived communities. Given decades of neglect, returns to better and greener transportation, energy and cities are very high.
This is far better than proposals such as universal basic income that are both inefficient and essentially give up on some people having anything to contribute to society.
Funding a generous universal basic income would require a massive increase in taxes and channeling huge resources through the government to redistribute it to many people who do not need it. It also undermines the principle that underpins the social contract that individuals, if they are able-bodied, should be expected to work and contribute to society through their taxes.
That principle also applies to corporations who should pay tax in the community in which they operate, not in some distant tax haven.
Princeton University Press
We owe each other more. Moving to a social contract that invests more in each other through well designed pre-distribution policies is good for both equity and growth. And if it is done well, the need for redistribution will diminish as more people have the capability to earn a decent wage and achieve a good standard of living.
So next time you look at your paycheck and lament the taxes paid, think of it instead as your payback for all that previous generations have invested in you and your contribution to the capabilities of current and future generations.
Minouche Shafik is director of the London School of Economics and Political Science, former deputy governor of the Bank of England and author of “What We Owe Each Other: A New Social Contract for a Better Society.”
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