Governments should combat inequality by using their tax revenues to create jobs, rather than simply redistribute money from the rich to the poor, a leading economist said this week in Davos.

Christopher Pissarides, professor of economics at the London School of Economics, told the World Economic Forum annual meeting that citizens around the world suffer extreme inequality, but punishing people on high incomes is not the answer.

“I don’t think taxing high incomes and simply taking the money and passing it on as transfers to lower incomes can work in today’s open globalised world,” Pissarides, who won the Nobel prize for economics in 2010, said in a briefing on income inequality.

Redistribution takes away the incentive for lower-skilled people to acquire skills and go into the labour market, he argued, and creates disincentives for higher earners to stay in the country, work hard and look for new ventures to make money.

Instead, he called for governments to use more imaginative ways of rebalancing incomes by creating more and better jobs at the lower end and investing in better education.

One example of such innovation, Pissarides said, is in Sweden. Tax rates can be as high as 60% but tax revenues are used to provide services that would not otherwise be created by the free market at a reasonable price. He said the best example is subsidised childcare, which allows both parents to work, and creates jobs for carers.

This, he said, “is boosting the income of the family, as well as the childcare worker because their salary is subsidised, and it reduces inequality”. Couples on lower incomes, who would not be able to afford expensive childcare, can stay in the workforce while raising a family, not just people on high incomes.

One reason this model is so successful in Sweden, he argued, is that people have faith in the state: “You have to have trust in the public sector. There should be no corruption. [In Sweden], because people have trust in the public sector to make use of the money, they pay it and tax evasion is very low.”

This stands in stark contrast with countries such as Italy, where citizens don’t see the results of paying their taxes in anything other than extremely highly paid politicians and civil servants, he added.

“Taxes in Italy are almost as high as in Sweden, but the money goes to the highest-paid politicians, highest-paid senior civil servants, and a big civil service – [there is] no market-driven provision of services which will create jobs,” he said.

However, he added that Italy’s prime minister Matteo Renzi is doing a fantastic job in trying to reform this system and moving in the right direction.

Asked by a member of the audience to give his view on a report by anti-poverty charity Oxfam, which reported that by next year 1% of the world’s population will own more wealth than the other 99%, Pissarides said: “It’s a shocking statistic and given the inequality it’s not difficult to construct other shocking statistics. It’s obviously something to worry about, but my view is that the real issue, and what you should really address, is poverty.

“I think we’d be doing better by emphasising ways of reducing poverty rather than by sensationalising the issue by saying how much the very rich people are worth.”

More from Davos:

• Davos 2015: Gordon Brown urges world leaders to invest in infrastructure

• Davos 2015: what bold pledges would you like business leaders to make?

• ‘It is profitable to let the world go to hell’

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