"He Wasn't Keeping Money in the Cayman Islands Because Sunshine Was Making It Grow Faster"

I interviewed Nobel Prize-winning economist Joseph Stiglitz earlier this month.

In this clip, Stiglitz discusses how our tax code and regulatory structure provide an unfair advantage to some, but not others, exacerbating inequality in America. Have a look. (A transcript follows.)

Joseph Stiglitz: Well, there are a whole set of things that help explain what's happened to increase the inequality. Some of this has to do with tax laws. The fact is that the people at the top can take advantage of a whole set of special provisions, exceptions, exemptions.

Mitt Romney, when he was running for the president, openly said that he was paying only 14% of his reported income, and that he was keeping his income, his wealth, in the Cayman Islands. Now, it's very difficult for most of us to keep our income in the Cayman Islands, and he wasn't keeping the money in the Cayman Islands because the sunshine there was making the money grow faster. It was something else. It was the lack of sunshine that allows for people to avoid taxes, not necessarily illegally, but to take advantage of the loopholes that they have succeeded in putting into the tax law.

The most egregious example of this is the carried interest provision that allows those working Wall Street to treat their income, ordinary income, as if it were capital gains. So rather than paying 35 or now 39.6, they get paid the capital gains, takes the tax rate 15 to 20%. So that's one example.

Second important example is the way our financial system works, that the underregulated financial system, provides more opportunity for money to move toward the top. There's a more general point -- when markets are competitive, incomes get driven down. When markets are not competitive, there are locks of rents, and the financial sector has been very successful in weakening competition. One example is provided by the way the secretive LIBOR market worked that allowed them to manipulate the LIBOR rate to take advantage of the rest of the society.

Another example is more broadly the CDSes, over the counter, non-transparent. I understand fully why they want those markets to be non-transparent. When markets get transparent, they get competitive. When they get competitive, profits get eroded, and so as an economist, let me say I totally understand what they're trying to do, but from a public policy point of view, it's outrageous.