Tuesday, December 28, 2010

Income inequality: Rein in the rich or lift up the poor?

In his post on income inequality, Mickey Kaus gets at another question that I want to get answered during my year of immersion reading: Is it better to restrain the income of the rich or to lift the incomes of the poor:

The question is then what makes Brazil Brazil. Is it wild riches at the top, or extreme poverty at the bottom? It seems pretty obvious, from what little I know of Brazil, that the problem is the bottom, not the top. We worry about Brazil because of the favelas, the huge impoverished shantytowns, and the crime coming out of them. 

I think Kaus is mostly right about this: I don't feel class-envy need to keep Bill Gates from earning another billion dollars or so. 


The evidence suggests that -- recent circumstances notwithstanding -- the amount of actual wealth in America grew during the last 30 years. And that the people who were already rich did pretty much all of the accumulating of that wealth, while incomes for the rest of us stagnated during that time. But I have a hard time believing that the people in the Top 1 Percent who accumulated all that additional wealth did all the creating of all that additional wealth. I suspect that additional wealth was created, in part, on the labor and ideas and sweat of people further down the food chain who might not've shared proportionately in the rewards. (Although perhaps I'll be disabused of that notion as I keep up my reading.)

Assuming they're not simply shills for rich business interests, that should concern lovers of the free market: If hard work and productivity don't actually bring you additional income -- and that seems to be the case under the prevailing ideologies of the last 30 years -- then where's the incentive to hard work and increase productivity? 

Preserving the free market aside, though, I think this is one of my concerns about growing income inequality: It suggests that most of us aren't being rewarded for our part in creating wealth for others. So I'm concerned about the runaway wealth accumulation of the Top 1 Percent because it suggests that the system is badly broken in its distribution of the wealth it creates, not because I don't want people to make more money.


Lou Covey said...

Joel, this is an interesting conundrum, when some politician says we should tax the rich, it's the middle class that gets hit. Even if you set the highest tax rate for those that make a million dollars or more, you are hitting the middle class, because most of those people are small business owners with an S corporation. The truly wealthy just look at that tax rate and stop receiving income, living off the royalties and interest until the rates come down.. or move out of the country like John Lennon did to avoid the high taxes in Britain.
Now if you really wanted to hit the wealthy, then you raise the taxes on capital gains. But all that does is discourage the wealthy from investing more of their capital, so businesses have to rely on government grants, increase spending and not helping raise revenue.
If you want a truly egalitarian tax policy, make S corporations with revenue under $5 million or with under 25 employees. That gives small businesses a revenue advantage and makes it possible for them to hire more people, expand, buy capital equipment and, thereby pay more business and sales taxes while creating more tax payers. It also makes startups more financially viable, which means investors would be more likely to want to invest capital.
All this expands the tax base which increases revenue and supports the middle class.

Joel said...

Lou: I think you're way ahead of me at this point! I'm still at the stage of trying to articulate why income inequality matters. Actual policy prescriptions to address the situation are beyond my purview at this point; I simply don't know enough about possible solutions to argue about them effectively at this point.

I'm not AGAINST soaking the rich, necessarily -- but I want to have a better grasp of the data and arguments at hand.