Tax-backed borrowing and the saving glut of the rich
An NBER working paper’s estimated model links part of the US saving glut among top earners to redistribution financed through borrowing backed by future taxes.
Financing redistribution through borrowing backed by future taxes helped fuel asset accumulation among the richest US earners, the authors of an NBER working paper argue. Their estimated model attributes a significant contribution to the saving glut among the top 1% to the financing shift that began in the early 1980s.
The mechanism depends on progressive taxation: high-income households bear most of the future taxes financing these transfers and respond by accumulating claims on households and the government. In the authors’ model, redistribution financed through inflation reduces the real value of public and private debt, changing the distribution of wealth. The authors therefore link the accumulation of assets partly to how transfers are financed.
Central-bank financing of government deficits is associated with an inflationary legacy in another NBER working paper. Using data from advanced economies and emerging markets since 1960, its authors find that left-leaning populist regimes are linked to increased central-bank lending to governments, which they use as a measure of deficit financing through money creation. That lending is associated with marked increases in inflation.
Countries with a history of left-wing populism and this form of deficit financing respond more strongly when expected inflation moves away from target. The relationship persists after the authors account for past inflation’s direct effect on monetary policy. Their interpretation is that central banks with this history need stronger signals of independence and commitment to price stability to keep inflation expectations anchored.
Automation introduces a separate question about who should bear taxes. In an NBER working paper calibrated to the US wage distribution and automation exposure, the authors find that machine intensity peaks around the 40th wage percentile. Automation substantially changes their model’s optimal tax rates because wages and returns to capital adjust within the economy.
Relative to an economy without automation, the authors’ optimal labor-tax schedule includes a larger earnings subsidy at the bottom, lower taxes in the middle, and higher taxes at the top. These are prescriptions within their model, whose assumptions include machines and workers being perfect substitutes in tasks that can be automated. The model’s optimal capital tax is sizable and remains unchanged by automation.