Kenneth Arrow Explains The Causes of Rising Inequality and Recommends Progressive Taxes

Kenneth Arrow describes the growth in inequality that we are familiar with by now. His comment on inequality is important, however, because he is a highly respected economist, and because he attributes the rise in inequality to market failure. The financial sector has captured 40% of corporate profits and it is responsible for much of the rise in inequality. It has accomplished this because of asymmetric information. Financial products are so complicated that consumers do not understand them as well as the producers, and they are unable to compare competing products and services as they can compare most manufactured products. Financial industry profits are the result of monopolistic competition,

It follows from Arrow's analysis that government should use a progressive tax system to redistribute monopoly profits as it has done in the past. His argument for taxing capital gains as ordinary income, and for raising more revenue from the estate tax mirrors the arguments made by other economists but it will have more influence because it comes from Kenneth Arrow.