A couple weeks ago, Rishabh Bhandari wrote a great book review (read it here) on “Winner-Take-All Politics,” a 2011 book explaining the origins, state, and consequences of America’s growing income inequality. In a comment, I pushed Rishabh on a couple of points regarding his article. Rishabh’s reply answered a few of my questions, but provoked me to start a more general discussion about the issue.
Let me begin by noting that Rishabh corrected a mistake I made, by noting that the statistics he provides in the article for income disparity records disposable income, which takes into consideration taxes and transfers.
1. “Fair” Taxation
At the heart of one of the main arguments for combatting income is the premise that there is something inherently unfair about the process of making money in America. That is to say, the argument goes that there are unfair systemic forces that discourage social mobility, stagnate the middle class, and create massive wealth magnets for the top one percent. I actually agree with this criticism – however, what’s truly “unfair” about the American economic system is not primarily our tax system, but our welfare system. A closer look at American welfare policy reveals just how regressive, wasteful, and counterproductive it truly is.
This is not quite true of our tax system. I largely disagree with the criticism that in America today, that “the rich don’t pay their fair share.” This slogan was largely the rallying cry for President Obama’s tax hike on the rich earlier this year and his futile campaign last summer to pass the absolutely trivial “Buffett Rule.” I pointed out in my original comment that in America today, the top quintile (20 percent) of wage earners makes 51% of the total national revenue, but pays a whopping 68 percent of the total federal taxes. That seems like a fair distribution of taxation to me.
Rishabh replied with a political argument: We live in a democracy, and the distribution of income is “fair” if the people believe it’s fair. Right now, the American people have no idea how vast inequality truly is, and are being constantly lied to by politicians whose policies favor the rich. So we should raise taxes to bring down inequality to the levels that are popularly supported.
I agree in principle. We do live in a democracy, so I have no principled opposition to the Congress democratically raising top marginal rates to combat inequality. I just think it’s a stupid policy. But I’m curious – the American people don’t know a lot of things about the financial system. For example, they don’t know how much money certain CEOs and executives make. Should we poll the people and ask them what an “acceptable” income is and set legal limits? What about the cost of land – should the people decide how much we sell our houses for?
These are obviously silly questions, but I think Rishabh’s invocation of democracy does not answer the policy question. Our Constitution refines public opinion through a complex system of separation of powers and checks and balances. This was the defense the founders gave for why we were not overly-democratic and why the people would not have such control over prudential matters like tax rates. So I think Rishabh needs a better normative principle for what “fair” taxes are than opinion polls.
2. Why is there inequality?
This is more of a technical point and I am certainly no expert on this topic. Rishabh quoted the authors of the book in arguing that the chief reason for the rise of income inequality is political corruption. He argued that both the left and the right are in the pocket of Wall Street and big business, which have built elaborate systems of think tanks and PACs to promote a pro-rich people agenda. This seems really wrong to me. If we look at inequality on a global scale, the primary forces at play seem to be globalization and technology. These are changes that have altered the system itself, and are not confined to K street machinations. This is a very important point, but one that I, unfortunately, do not have the necessary knowledge to debate.
3. What’s Wrong with Inequality?
This was the second point I brought up – what is actually wrong with inequality itself? Inequality has been increasing consistently pretty much since people stopped hunting and gathering and started farming. Let’s say you had 10 people in a community. All of a sudden, the richest person’s income doubled. Nobody else’s income changed and they all have enough to live off of – it’s just that the richest person is now even richer. Is the community somehow more unjust now?
Obviously that’s not what’s happened in America, but the thought experiment demonstrates an important point – there’s nothing intrinsically wrong with inequality! Now there are other things associated with inequality that are intrinsic wrongs and should be combatted – inequality of opportunity, poverty, declining social mobility – but these are separate problems from inequality.
Here’s another hypothetical to demonstrate why inequality itself is not the problem. Let’s say we could combat inequality simply by taking away money from the rich. That’s it – no redistribution. Obviously the distribution of wealth or income would become far more equitable. But this is obviously a ridiculous policy – we only support taking away money from the rich if it’s going to help other people. That means that the real objective is to help others, not to combat inequality.
4. The Difference Between “Fighting Poverty” and “Fighting Inequality”
It seems to me that the chief arguments for combating income inequality are that the rich need to pay their fair share and that the poor are struggling and need more help than we are giving them. The first concern I think I have dealt with. The second concern is absolutely critical, and happens to be the issue I am most passionate about. But the way to combat poverty is not by doing simple lump sum transfers from the rich to the poor. The reasons the poor are falling behind is due to related yet wholly distinct forces.
Let me begin by explaining my support for capitalism. I do not have any particular moral attachment to capitalism, I think it is the best system because improves the living conditions of everyone. If capitalism made the rich richer at the expense of the poor, I would oppose it – but that’s not what happens. Capitalism can make the rich massively richer, but also does more than any other system to improve the living conditions of the poor. I don’t need to go all Milton Friedman on this point, but a simple comparison of Hong Kong and mainland China should suffice. So combatting inequality by “changing the rules of the game” i.e. moving away from the capitalist framework will ultimately have the effect of, to paraphrase Margaret Thatcher, “making the poor poorer, so long as the rich are less rich.”
To combat poverty, we should reform welfare. Personally I think Medicaid and Social Security are two of the worst programs in American history, and should be replaced with a simple negative income tax. I think the US government should write a check to every family in need for an amount based on their need.
There is one area Rishabh brings up where I am not sure how to respond. This is in his study of the differing social conditions between the rich and poor in America. A lot of this has been played out in the work of Charles Murray, who has documented how social life is in dramatic decline in poor America. I am unsure which way the causality runs on these issues – does inequality breed
Rishabh raises a good point though about social mobility. There are studies that show this so-called “Gatsby curve” wherein growths in income inequality can lead to a decline in social mobility. But I think we are fooling ourselves to suggest that the cause for weakening social mobility is growing income inequality. Look at the public schools we give to the poor and look at the unbelievably distortionary welfare system we force on them. These are the true culprits for the increasing stratification of American society. We have a welfare system that discourages work and, most importantly, we have a public school system that fails the people who need it the most.
There are lots of problems with the American economic system. We need fundamental tax reform to promote growth and thereby promote employment and wage appreciation. We need welfare reform to stop punishing the poor and institutionalizing a permanent underclass. And most of all we need education reform (starting with universal early childhood education) to provide equal opportunity and to promote social mobility. What we don’t need is to arbitrarily start raising taxes on rich people, as if that will do anything.