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Inequality distorting economy, U.S. economist Paul Krugman says

The vast income disparity between the wealthy and the middle and lower classes in the U.S. is distorting the economy in significant ways and could be remedied in part by increasing taxes on the rich, Nobel Prize-winning economist Paul Krugman told CBC's Lang & O'Leary program Thursday.

Boosting taxes on wealthy would allow investment in social programs, Nobel Prize winning academic says

Danielle Bochove interviews the Nobel Prize-winning economist on the pay gap between CEOs and workers, and what can be done to address inequality between rich and poor countries. 5:48

The vast income disparity between the wealthy and the middle and lower classes in the U.S. is distorting the economy in significant ways and could be remedied in part by increasing taxes on the rich, Nobel Prize-winning economist Paul Krugman said on CBC-TV's Lang & O'Leary Exchange Thursday.

Krugman, who is a professor of economics and international affairs at Princeton University and writes a regular column for the New York Times, was in Toronto to participate in the Munk Debates, a series of annual debates on major social and political issues.

He debated the merits of increasing taxes on the wealthy with former Greek prime minister George Papandreou, leading Republican and former speaker of the U.S. House of Representatives Newt Gingrich and Arthur B. Laffer, an economist and former adviser to former U.S. president Ronald Reagan.

"There are reasons to believe that high levels of inequality do make you a worse society," Krugman told the CBC's Danielle Bochove, "that they lead to reduced social cohesion in a lot of ways, that they lead to increased stress — that it is, roughly speaking, unhealthy to be as unequal as we've now become."

Inequality of 1960s tolerable

He said there is no magic number for how much more a CEO of a corporation or bank should make than the average worker but that the level of income inequality in the1960s was a lot less destructive than what we are seeing today.

"I don't think the level of inequality that was prevailing in the U.S. in the 1960s when CEO salaries were 40, say, times that of an average worker was problematic," he said.

The decent, affordable education and social programs that the middle class used to be able to rely on have been eroded, Krugman said, which has left middle-income Americans scrambling to take on more and more debt in order to move to better neighbourhoods and access better schools, for example.

Increasing taxes on the wealthy would provide the government with much-needed revenue to be able to put some of the funding back into education, infrastructure and social programs for the poor, Krugman said.

"It's not a single silver bullet, but give me significantly more revenue applied in ways that help the typical American or the worse off than average American, and I think you can do quite a lot," he said.

"It doesn't have to be a radically egalitarian society. We don't have to be Cuba, but we really don't want to be Gilded Age, and that's where we are right now."

To hear more of Krugman's thoughts on income inequality, watch the entire interview above. To see highlights of the debate on taxing the rich, visit the Munk Debates website.