Why focus on progressive taxes and not on progressive transfers?

Many posts in the economics blogosphere on the subject of progressive taxation today: Greg Mankiw discusses this paper, Mark Thoma points us to a WSJ article, and Brad DeLong  links to Mark's post twice (here and here).

Inequality - both its level and the rate at which it has been increasing in Canada and the US - is a serious issue. But taxing the rich (and dealing with the resulting incentive effects) isn't the only policy instrument at our disposal; we can also reduce inequality by directed transfers to low-income households.

A couple of weeks ago, at the meetings of the Canadian Economics Association, Andrew Jackson presented a paper with the following table:

I've just ordered the Pontusson reference upon which this table was based, so I'll come back to this point as soon as I can. But it looks very much as though the Nordic countries - which are rich, devote a large fraction of their income to social programs and which do fairly well in reducing inequality - seem to have given up on tax policy as an instrument for income redistribution.

Comments

[John Jensen]

[I really enjoy your blog and find every post to be very thoughtful and interesting]

Being a citizen of Canada and of one of the Nordic countries, I agree the Nordics have largely forsaken the tax policy you describe. This is IMHO as much due to efficacy reasons as to cultural ones -- their citizens are more agreeable to the higher involvement of the state in their daily lives that these sorts of policies naturally entail.

[reason]

And I think this needs to be more widely read - I'll try and get Mark Thoma to pick this up.

I happen to have always thought this - mainly because income is so hard to define and because it is hard to define progressive tax systems that don't have perverse effects on savings and investment.

[thwap]

Okay, I don't follow and I'm lazy. Where are the revenues for the transfers supposed to come from if not from progressive taxation?

[Stephen Gordon]

The short answer is consumption taxes. A longer answer is here, and I'm working on an even longer version that I hope to post in a couple of days.

[thwap]

Ah yes! I remember you now.