Redistributing Wealth and the US Election

In their book Innovation Economy, authors Robert D Atkinson and Stephen J Ezell talk about the competing ideologies with regard to the tax system and wealth redistribution between the Democratic and Republican parties that were clearly debating points in this closely fought US presidential election of 2012. They say that

Washington economic politics has become a redistributionist battleground between ...the Right, seeking to funnel resources to their Main Street members (small business), and ... the Left, seeking to funnel resources to their Main Street members (low- and moderate-income Americans).

Behind this tussle between the Left and the Right in America is a fundamental question about what grows the economy. The Democrats using the arguments of John Maynard Keynesian essentially believe that growth occurs by supporting demand from the middle class. The Republicans borrowing from the thinking of Robert Mundell and Arthur Laffer and supported by Milton Friedman believe that growth comes by supporting the supply side of the economy through entrepreneurs and small business.

Atkinson who also wrote the book Supply-side Follies has been arguing that this debate is the wrong one to have. Borrowing from the ideas of Joseph Shumpeter, Douglass North and Mancur Olson, he believes that the reason why the US economy has stagnated in recent years has been because of existing policy failures to encourage investments in technology and innovation.

Over time, he believes the US tax system has diminished the incentives for innovative activity. The problem was created by economic advisers of both parties who advocate for flatter tax rates with a broader base. In line with this, broad based tax cuts have been offered to corporations and small business owners in exchange for disallowing tax deductions for productivity enhancing measures.

As a result, much of the tax cuts aimed at the top income bracket have been wasted on businesses that don't trade with the rest of the world or invest in productivity enhancing innovation. Rather than squander these tax cuts on the wealthy, it would be better spent targeting future wealth-creators. This includes entrepreneurs that are forced to innovate in order to remain internationally competitive as well as universities and research institutions that prepare scientists and engineers to become innovators.

This targeted approach for spurring innovation through tax policy is what is missing from the current debate which has focused more on the justification for auto bailouts, renewable energy companies, and the loosening of business regulation. Not a lot of attention has been devoted to what really drives growth in the economy, structural as opposed to cyclical growth. And that is perhaps why the race is so dead even.