Sunday, December 5, 2010

Income inequality is NOT a bad thing.

In light of the current debate in the Congress about extending tax cuts for the "rich," I feel compelled to revisit the question of economic inequality.

Perhaps the most stubbornly persistent idea embraced by American "liberals" (statists) is the idea that the rich ought to pay more tax (meaning a higher proportion of their income) because income inequality is a bad thing. This idea is widespread. It has achieved the status of a self-evident truth. And yet when one examines it carefully one sees that the belief is not only illogical, it is also unworthy.

At the most practical level it is just silly - though dangerously so. There is no reason to believe that target-taxing people who earn more than $250,000 a year will help anyone at all. The argument is that government needs that revenue to prevent the deficit from getting any worse. And, after all, the "rich" can afford it. This kind of reasoning comes from economic ignorance (notwithstanding the fact that many of the people who are making it should know better). It comes from focusing on the short-term-direct effects of any policy and ignores the longer-term-widespread effects. The deficit is the result of a shortfall of tax-revenue against expenditure. But taxes affect behavior. A lower tax rate may actually boost revenue if it encourages economic activity. This is not just a theoretical possibility; there are many historical examples of this. So, if its just the deficit that is the problem, it is by no means clear that soaking the rich will help and may likely hurt. There is nothing that helps cure government deficits more than vigorous private-sector economic activity which generates lots of tax revenue, and low levels of taxation are crucial for this in the long term.

Of course the best way to reduce the deficit is to cut government expenditure - but that is a subject for another blog.

If, alternatively, the liberals are concerned about jobs (especially for the poor and for minorities) they should understand that it is only the rich who create jobs. Government jobs depend parasitically on value created in the private sector; government does not create much value itself. Its role is to create conditions that allow for the creation of value by productive, entrepreneurial activity. Without the rich there are no jobs. Without the rich there is no economic growth. If you tax the rich you tax the desire to become rich and create jobs.

So, at a practical level, the policy is ill-advised. Liberals reading this will roll their eyes. "We have heard this before from the likes of Ronald Reagan - it is 'trickle down' economics and it is nonsense. The rich don't spend their money on creating jobs, they save it and the money does not trickle down to the poor." Again, economic illiteracy. Those making that argument could not possibly really believe what they are saying. If they did why would they stop short of advocating the complete elimination of all income inequality? Why not raise income taxes on the rich sufficient to erase all income gaps? Contemplating that, they will realize that this would be disastrous, that it would most probably destroy the economy by killing golden egg-laying goose. But somehow mild income leveling has no bad effects on the goose? Listen guys, we know that 'trickle down' must work. Even if the rich save their income, that money comes back into the economy through the capital market (at least it will when it starts working again!). Its not really 'trickle down.' Its 'spread it around.' Taxes shrink the pie, tax-cuts expand it. Its not a zero-sum game and its not rocket science. You can't simply take taxes from the rich and give them to the poor (which rarely actually happens anyway) without destroying economic value.

Yet, having said all this, I suspect that deep down the intelligent liberal knows it already. I suspect that this is not what its really about. We have had upwards of forty years of the war on poverty and there is apparently no victory in sight. If you add up all of the money extracted by taxes for so-called poverty programs, and divide it by the number of people classified as "poor," there should not be any poor people left. Contributions are more than adequate to ensure no poverty. Why are the poor not getting "their" money? Why indeed? Poverty in America is actually less of a condition than an industry employing millions of parasitical bureaucrats with a vested interest in its perpetuation. [Many of them are sincere - they know not what they do.]

No, I suspect the real reason behind the desire to sock it to the rich with a big tax stick, is the powerful visceral appeal of the act of reducing income inequality. Inequality has taken on a life of its own as a bogey man. Its not really poverty that is the problem in liberal eyes, it is inequality. Sans poverty, inequality would still be problem for them. If somehow the poorest person in America earned a million dollars annually and the richest earned a billion, this would still be a problem for them. If the rich billionaires were small in number yet owned a large proportion of the wealth, and the millionaires were large in number yet owned a proportion less than their numbers in the population, this would still be a problem for them. I think they will admit this. Inequality, in and of itself, is a problem for them.

Now, why should this be so? Oh, they have ready answers. But, though they may dress it up in all manner of respectable rhetoric like "the dangers of relative deprivation," in the end it comes down to just two basic and very base emotions - resentment and envy! That is what it is really about. The liberal mind hates all inequalities. It cannot abide "gaps." Its policy motivations are all about the eradication of gaps. There is a deep-seated resentment of the acquisition of riches. There is a barely acknowledged envy of the rich. How much is resentment and how much envy, who knows? I suspect the intellectuals are more resentful and the liberals who are poor are more envious, it doesn't matter much. Both are equally unworthy.

Think about it. What are the values we try to inculcate in our children? Generosity, sharing, joy for the good-fortune of others. And what values do we condemn in them? Resentment, envy, and the inability to rejoice in (or at least respect) the achievements of others. Yet when it comes to the fashioning of economic and social policy we somehow think its ok to reverse these values and extol the benefits of enforced equality, elevating resentment and envy to national virtues. Echoing Adam Smith, how can what are vices of private behavior become virtues when practiced by government?

Poverty is bad. Income inequality is not. It is a necessary outcome of a free society in which people make different lifestyle choices and encounter different odds. To be sure, all free people should be equal in the eyes of the law, they should be equally subject to the rule of law, but they should not be made to be equal in results when they violate no law.


Troy Camplin said...

A few thoughts. Wealth distribution is a power law distribution. In every country, the top ~20% have ~80% of the wealth. The logic of such a system is clear: reduce the wealth of the top 20%, and you reduce the wealth of everyone. Second, and directly related to the above observation, the economy is a small world aristocrtic network. Those who engage in the most economic transactions are the most linked; those who engage in the least, are the least linked. Again, there is a power law distribution. Further, in such networks, the rich get richer. But note that such networks are not zero-sum games (where the number of links remains the same); no, such networks are positive-sum games. The rich get richer as they engage in more and more economic transactions, but the poor also get richer, because they too are engaging in economic transactions, even if it is less often. This is nature. You cannot legislate away nature.

Peter Lewin said...

A network-theoretic perspective. Interesting. Makes sense. We must however not lose sight of the volitional aspects that drive the network elements.

Troy Camplin said...

The network geometry is universal -- yet when it comes to human things, you are right that we must not lose sight of the volitional. There are reasons why this or that particular individual or corporation is the most highly linked.

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