OK, so let’s say you are really worried about rising income inequality. How, exactly, would the Buffett rule or raising taxes on private equity investors address this problem?
Not at all if you think the causes of rising inequality are a) greater demand for high-tech skills, b) globalization increasing returns for “superstar” executives and entertainers, and c) a crony capitalist financial system. A better focus, reminds a study on VoxEU, “would be on restoring America’s place as a world leader in public education and thereby tackling the human capital deficit that is at the heart of the inequality challenge.”
I would add to that pro-market financial reform, not the pro-regulation version pushed by Dodd Frank. But education really has gotten scant attention during this election season. As I wrote almost a year ago concerning pro-growth economics:
But taxes and capital are only part of the equation. Certainly just as important in boosting growth is encouraging innovation and technological change. And having the proper reward and incentive system for potential innovators is critical. Taxes matter for this, too.
But two other elements are also necessary. First, America must remain open to the change and Schumpeterian creative destruction that innovation brings and not try to stifle it through regulation, crony capitalism, and anti-competitive trade barriers. Second, America needs to improve its supply of human capital so, as economist Joel Mokyr puts it, there is a “cadre of ingenious and resourceful innovators who are both willing and able to challenge their physical environment for their own improvement.”
This “cadre” can be both imported from overseas (via more high-skilled immigration) and developed at home (through an education system that better cultivates and challenges high-ability individuals). Education reform, in particular, should be the next great battleground for supply-siders. And just as the supply-side tax revolution started at the state level with California’s Proposition 13 in 1978, supply-side education reform is starting local, too, in Wisconsin and New Jersey as Republican governors there battle government teachers unions.