Kill two economic policy birds with one stone: more generous, funded transfer payments

Many are fretting, in the face of Brexit and Trump and Le Pen and AFD and Five-Star that economies are doing too little to combat inequality.

At the same time, with global real rates set to be low for the foreseeable future, economies are going to live closer to the zero bound in future, and in the shadow of business and financial cycles that we now realise can be larger than we thought before 2008.

So how about raising effective tax rates and spending them on more generous transfer payments through the social security/insurance system?

This helps inequality, [redistributing from those earning enough to pay taxes to those who are not] and it amplifies the automatic stabilisers, helping out monetary policy at the zero bound in the event of a recession.  The amplification of the stabilisers means that when a recession hits, tax revenues fall by more, the greater the effective tax rate to start with;  and transfer payments rise by more, the greater the replacement ratio used to start with.

Steady-state inequality is eased in two ways.

First, even at its resting point, capitalist economies will separate people from jobs and from the labour force, sometimes permanently. Higher taxes and transfers benefit those thus dumped on the scrapheap.

Second, recessions tend to hit those at the bottom disproportionately.  The automatic stabiliser amplification gives those who lose their incomes more when they do, but the recession itself will tend to be smoothed somewhat, so the income loss for those at the bottom will be less to begin with.  Averaging over many decades, this tendency to provide more income to the jobless, and reduce joblessness in recessions, will help inequality.