Greg Mankiw is right. I don't embrace this:
WSJ: Barring a breakthrough in productivity, how can the U.S. solve the problem of its impending obligations? Should it raise taxes or cut Social Security benefits?
Prof. Phelps: Over the last couple decades, the federal government has virtually abolished taxation of a wide swath of people with smallish incomes. This was a mistake, because we need all the tax revenue we can get. It's inefficient to have low marginal tax rates on low incomes, because people with upper middle incomes and high incomes get the same breaks, but they don't get any incentive to work harder. What you want to do is give tax breaks that give people an incentive to earn income that would not otherwise be earned. So in my view, President Bush should have restored the taxes on the low-income people rather than lowering the taxes on the high-income people.
I see. We set aside equity and raise taxes on the poor making it harder for them to get by day to day. Because of that, we increase government spending and transfer payments to the poor to help them, essentially giving them their money back. Finally, we complain about the increased government resources devoted to the poor.
Good strategy. Phelp's does have a plan for those extra revenues from raising taxes on those with "smallish incomes," give the money to firms so they can employ those with "smallish incomes":
WSJ: Would that be economically just, especially at a time when the gap between the rich and the poor has been growing?
Prof. Phelps: I think economic justice is all about pay rates at the low end relative to those in the middle. So the government needs a lot of tax revenue to meet the problem of low-wage workers. Too many people in America suffer joblessness, and when they are employed they can't earn a decent living. I've been advocating a solution: subsidies that would be paid to companies for the ongoing employment of low-wage workers. The resulting increase in the demand for those workers would pull up their employment and ultimately give a big boost to their paychecks.
We should just let them keep the money to begin with and, if there are subsidies to low-wage workers, fund them with (gasp) taxes levied on people a little higher in the income distribution.