by If wealth inequality is to be prevented from becoming worse than the horrendous level it has already attained, then the only way this can be done is by larger government spending that is financed by a tax on the rich, either a profit tax or a wealth tax.... We have been talking about the “private sector”, but since workers more or less consume what they earn, it is the capitalists whose savings increase because of the fiscal deficit and who hold claims upon the government. And here, the real point to note is the following. The claims that capitalists hold against the government because of the fiscal deficit have been put into their hands by the fiscal deficit itself. It is a booty handed to them by the government which they have done nothing to earn. The resources which the government
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If wealth inequality is to be prevented from becoming worse than the horrendous level it has already attained, then the only way this can be done is by larger government spending that is financed by a tax on the rich, either a profit tax or a wealth tax....
We have been talking about the “private sector”, but since workers more or less consume what they earn, it is the capitalists whose savings increase because of the fiscal deficit and who hold claims upon the government. And here, the real point to note is the following. The claims that capitalists hold against the government because of the fiscal deficit have been put into their hands by the fiscal deficit itself. It is a booty handed to them by the government which they have done nothing to earn. The resources which the government obtains for spending through a fiscal deficit come out of the larger output generated by the stimulus it provides, and the profit part of this output simply lands on the capitalists’ lap, a fraction of which they hold as savings, in the form of claims on the government.The purpose of the tax Prabhat Patnaik recommends would be to claw back rent extraction, economic rent being the source of asymmetries that arise owing to asymmetrical markets instead of earning deserved on the basis of contribution through competition in "free market," "free" meaning free of asymmetries that bias outcomes. This was at one time the case with a very progressive incomce tax (90% at the top level), and a steep inheritance tax. Those levies have been way chipped down.This also tells us why a fiscal deficit is not a good way of financing government spending. It is not because of the spurious arguments put forward by the representatives of finance, but because a fiscal deficit increases wealth inequality. If, for instance, the government taxed away this booty through a profit tax or a wealth tax, then the capitalists’ wealth will remain the same as it was before the increase in government spending; but if it does not, then this wealth increases by exactly the amount of the fiscal deficit. This increases wealth inequality in the country.
Since a fiscal deficit puts wealth into the hands of the capitalists without their doing anything to earn it, it gratuitously increases wealth inequality in the economy; and that is what is wrong with it, compared for instance to tax-financed government spending....
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Prabhat Patnaik | Indian Marxist economist and political commentator, Professor (retired) at the Centre for Economic Studies and Planning in the School of Social Sciences at Jawaharlal Nehru University in New Delhi (1974-2010) and formerly vice-chairman of Kerala State Planning Board (2006-2011)