- Reason Awakes -

Income Inequality and Redistribution

 

Equity and Fairness

 

The previous plank on taxation and deficit and debt reduction dealt mostly with improving the economic efficiency of our society, while alluding at times to the issue of fairness.  This plank  addresses the issue of equity and fairness directly. It deals with the questions: What do “equity” or “fairness”  mean in our society and what is the best way to achieve them?

 

Income Inequality and Redistribution

 

In recent years, a lot of attention has been directed at the rise of income inequality in the United States. This attention has added to the voices, in some circles, calling for greater government efforts to redistribute income and wealth.

 

We believe that it is inevitable and appropriate, in a democratic society, that government will act to redistribute income and wealth through taxes and government spending.

The difficult philosophical question is: What degree of redistribution is best from the perspective of society as a whole? 

The philosopher John Rawls suggested that a just society should answer this question based on the kind of society its members would choose if they were unaware of what their personal circumstances would be in that society.

Of course, we don't make decisions that way. Every time a proposal for a change in taxation or government policy is made, people quickly figure out what the consequences will be for themselves before deciding where to come down. Politicians do the same, calculating the consequences of the policy changes for the constituencies that keep them in office.

We are not idealistic enough to think that the electorate can be converted to a Rawlsian approach. What we are hoping for is a form of enlightened self interest, free of avarice and envy.

Income Redistribution and the Tax System

One might think that democratic societies would have a bias for excessive redistribution through the tax system. There are a number of reasons, however, why the democratic political process does not collapse into a system in which the bottom 51% confiscates all of the income and wealth of the top 49%.

First, many of those in the bottom 51% expect that they, or their children, will be in the top 49% and therefore oppose this kind of confiscation less they, too, become victims of it.

Second, most people in the bottom 51% understand that the size of the pie is not fixed. At some point, taxing away the income and wealth of those who are better off than they are, destroys incentives for work and investment and ultimately impoverishes everyone, including the bottom 51%.

Third, money caries with it political influence. This seems pernicious to many people, but, ironically, it may be a good thing, at least in part. The role of money in politics may act to offset any tendencies of democratic states to over tax and over redistribute income and wealth.

 

Finally, confiscation of wealth through the tax system strikes many, including many of the intended beneficiaries, as wrong. 

We have come to the following conclusions with respect to tax based redistribution of wealth and income:

1) At some point, a tax system can become too “progressive” even from the point of view of the apparently untaxed. Making the tax system any more progressive than it currently is risks shrinking the size of the economic pie and we therefore oppose it. Reducing taxes on work and investment, somewhat, will probably stimulate economic growth and benefit everyone and we therefore support it. 

2) As attractive as it might be to go to a flat tax for ease of implementation, the fact that doing this will result in very high income individuals being much better off than they are now means that it is unlikely to get anywhere politically.  It's not that we think it would be bad public policy, but that we think "you can't get there from here." We therefore oppose going all the way to a flat tax.

 

3) Recognizing that self-perpetuating and severe disparities of wealth undermine the popular support for our economic system, we favor retaining the current federal estate tax provisions. Those provisions currently provide exemptions of $5,000,000 of wealth ($10,000,000 for a couple).  While repealing the estate tax has philosophical appeal, since it is a form of double and possibly even triple taxation, we don't think that repeal is politically feasible. We also believe that the estate tax does serve to mitigate the trend toward greater wealth and income inequality over time. 

 

4) It is unwise to have a tax system in which any group of citizens pays little or nothing for government services. Such a system only encourages those groups, wholly insulated from the costs of government, to prefer too much of it and those groups paying a disproportionate share of the cost to prefer too little of it.

 

5) At some point a “progressive” tax system can become confiscatory and an instrument of class warfare.  

 

A balance therefore needs to be struck. One broad parameter of that balance is that nearly everyone should pay at least some taxes but the rates should be quite low for very low-income people. Another parameter of that system ought to be that the tax rates should not be so high that they materially distort the incentives for work, investment, and savings. We believe that room for honest disagreement exists on where to strike this balance. But we do not believe that the system would benefit the taxed or the untaxed, by being any more “progressive” than it currently is.


Inequality of Opportunity and Government Programs: Focus on Social Mobility and Equality of Opportunity Rather than Income Equality

 

We believe that social mobility and equality of opportunity are more important values in our society, than income or wealth equality. We, therefore, favor government programs that increase social mobility and equality of opportunity rather than those that directly redistribute income or wealth.


While we believe that the distribution of wealth and income that would emerge over time in a totally free society would not be fair, it is not because income and wealth inequality are unfair per se. Wealth and income beget wealth and income inter-generationally, thereby unfairly tilting the playing field. 


Redistribution Through Effective Education Subsidies


The best way to offset inequality and promote social mobility and equality of opportunity is for society to subsidize education for the less well off and to make sure that the educational system efficiently prepares students to fully participate in the economy after graduation.


Support for publicly funded education runs very deep in this country. We believe that it would be even stronger if the money was efficiently spent and produced better results.  There is probably no better way to increase social mobility and reduce income inequality than preparing every student to participate in the market place after graduation.

Redistribution Through Health Care Subsidies

We also favor current government programs that provide health care for poor children and pregnant women on the grounds that this care promotes social mobility. More broadly, the kind of subsidy embodied in the Platform's Health Care section also constitutes a redistribution that is intended to improve social mobility and equality of opportunity through improved health.

 

The Sources of Increased Income and Wealth Inequality

 

Some people are smarter than other people, some are more talented, some work harder, some delay gratification and invest heavily in education and otherwise, some make more remunerative career choices, some are luckier, some are born into families that give them an extra edge, some inherit significant wealth. All of these contribute to income and wealth inequality but all of these have been true for a long time and, therefore, do not explain the current growth of income and wealth inequality.

 

What does explain this trend is the extent to which technology and globalization leverage all of the above factors. The emergence of radio, television, and the movies in the twentieth century made it possible for actors and athletes who would otherwise have led fairly modest lives, financially, to become seriously rich. Technology puts a premium on being the absolute best, so that the very best athletes and actors became wealthy, while the average person seeking to make a living in these fields still ends up living modestly. More recently, the globalization of world markets and the advent of computers and the internet have leveraged skill, talent, effort and luck at all levels. 

 

We don't believe that increased income and wealth inequality is a problem in and of itself. The immense gains to be made by success in this environment have driven individuals and firms to produce fantastic technologies that benefit consumers in innumerable ways.

Income inequality becomes a problem because income and wealth inequality can beget even greater inequality and because it can, therefore, become a barrier to social mobility and equality of opportunity.

 

If a significant portion of the bottom quintile of society continues to rise to higher levels, then substantial income inequality, or even rising income inequality, does not seem to us to be a problem. But if our society becomes stratified with all of the poor remaining poor and all of the rich remaining rich, intergenerationally, then we have the seeds of true class warfare. 

 

Focusing our efforts on combating income inequality through increasing social mobility and equality of opportunity has the added benefit that it is a positive sum game. Educating and training poor people to become healthy, productive members of society increases total economic growth and lowers the tax burden on all others. Focusing on lowering income inequality through the taxation of work and investment shrinks the total economic pie and impoverishes everyone.

Inevitability of Some Increase in Income Inequality in a Globalized, High Tech World

In a world with globalized markets and accelerating technological change, income and wealth will flow to those individuals and those societies that make the sacrifices or take the risks necessary to be the best. If as a society, we twist the tax system to reduce the rewards for that effort we will get less of it. The consequence will be that income inequality will still continue to grow but the newly enriched will live in other countries and pay taxes in those societies. This may happen because successful Americans may choose to migrate, or because others who would have migrated to the U.S. to begin new enterprises will no longer choose to do so, or simply because these successful enterprises will begin to emerge in other countries where they are less heavily taxed.


Competition Redistributes the Benefits of Technological Change

The benefits of technological change to the innovator can be immense in a global market. However, these 
benefits are often quickly competed away as other firms enter the market with slightly better and/or cheaper products. The ultimate beneficiary ends up being the global consumer who now has access to better and less expensive products and services.


Need for Better Data on Income Inequality and Social Mobility


Much of what appears to be income inequality may be the fault of the way we track the data. Individuals who sell family businesses may temporarily appear in the top couple percentage points but this income often reflects decades, if not lifetimes, of effort and investment.  Similarly doctors, who invest heavily in their educations and defer earnings during their extended educations, tend to show up in the top percentages. If these numbers were looked at over a life cycle and after tax, the incomes of doctors and others who invest money and time in their educations would move toward the middle. As education becomes a more important determinant of income, the need for focusing on this effect becomes more important. Similarly, athletes, entertainers, and even investment bankers may have years in which they pop into the top percentages only to drop down significantly, if their careers take a turn.

In general, it would be useful to have data on income and wealth distribution presented on a life cycle basis and after tax and income transfers like food stamps, social security and medicare and medicaid are taken into account. It would, also, be useful to have intergenerational data available to help assess trends in long-term social mobility.
 
Total Redistributive Effect of the Platform

We are not sure what the total redistributive effects of the Platform outlined here will be. We believe, however, that lower income people will be helped, disproportionately, by the proposals for greater expenditures on health and education. They may, however, be hurt, relatively, by the proposals to shift taxation away from income and toward externalities and user fees.

 
Non-Competitive Behavior and Crony Capitalism

We believe that people would be far more comfortable with accepting the inequality that arises from the market place if they thought it stopped there. But people often suspect, with some cause, that some of the winners use their economic power to protect themselves from competition from others. This can be accomplished by using market power to prevent others from entering a market with competing products or by using money to gain political influence to restrict competition or gain an unfair competitive advantage or subsidy.


We believe in enforcement of the anti-trust laws as a way to limit the first kind of anti-competitive behavior. We believe that the best way of limiting the second kind of anti-competitive behavior, often referred to as "Crony Capitalism," is to limit the role of government in the marketplace. For this reason our public policy prescriptions are as broad based as possible, so as not to give a handle to those with political power to use it to enrich themselves or their constituencies

Express Your Opinion!
Tell us how you feel about the issue addressed on this page: