Overview: Fiscal Policy, Distribution, and the Middle Class

1The economics of distribution has long dominated economic policydebates. The issue of income distribution in rich countries has centered on the question of who gains from public expenditures and who pays for them. In the United States, this discourse was aided analytically by the path-breaking work of Joseph Pechman more than thirty years ago.1 His research at the Brookings Institution helped us understand not only who benefited from what kind of expenditure but also how they stacked up when aggregated across expenditure categories. Work on fiscal incidence has long been a central part of the economic policy debate as well, beginning long before, but aided by, Arnold Harberger and Richard Musgrave and others.2 One of the outcomes of this analysis in the United States has been a recurring concern for the fairness of the system and, in particular, concern for the extent to which the middle class was being effectively disadvantaged by fiscal policies. This concern for greater equity in fiscal policies has been a very high profile issue in Europe as well, where the advent of the European Union has placed a huge premium on the reduction of income disparities among members. It may be said that a large share of the significant gains of new entrants is attributable to the expenditure policies of the European Union. This income convergenc