On a global scale, inequality is declining. While it has increased within the United States, it has not grown nearly as much as people often claim. The American poor and middle class have been gaining ground, and the much-touted disappearance of the middle class has happened mainly because the ranks of the people above the middle class have swollen. And while substantially raising tax rates on higher-income people is often touted as a fix for inequality, it would probably hurt lower-income people as well as the wealthy. The same goes for a tax on wealth.
Most important: Not all income inequality is bad. Inequality emerges in more than one way, some of it justifiable, some of it not. Most of what is framed as a problem of inequality is better conceived as either a problem of poverty or a problem of unjustly acquired wealth.
These are two of the opening paragraphs of my article “The Truth About Income Inequality,” Reason, February 2020.
Read the whole thing.
READER COMMENTS
artifex
Jan 27 2020 at 11:24pm
“Piketty and Saez assume that underreported income is proportional to reported business income, whereas Auten and Splinter assume that lower-income business owners disproportionately underreport. Auten has been at Treasury since 1987, which makes me inclined to trust his instincts here, but you can decide for yourself.”
This is not a good argument and you know it.
A better argument is that it is easier for small businesses to underreport income because they are often self-employed and include construction and restaurants where it is easier not to record some transactions.
Phil H
Jan 28 2020 at 12:04am
This is a bit abstract, but I think if you want to argue that inequality is not bad, you should be working a lot harder to make the case. Because I don’t often see strong talking points in favour of this argument. Usually it’s just this rather flabby redirect toward poverty.
But equality is a powerful driver of human emotions. How much time do we spend worrying about treating our kids equally? (For me: a bit. We changed schools because I couldn’t afford to keep both in the expensive one.) We create hugely elaborate structures to ensure equality (fairness, or equal chances) in educational tests. Equality before the law is a cornerstone of all systems – including libertarian conceptions of law. Democratic equality appears to be a universal value – there are no countries that actually offer anything other than one person one vote, are there?
So if you want to argue against economic equality, that’s fine. But I think you owe it to the rest of us to actually make the argument, not just dodge around it. It’s not terribly hard – I can think of three decent arguments off the top of my head. But every time I see that line – oh, you’re not really worried about equality, you’re really worried about poverty – it gets my goat. And if you want to shift the opinions of Piketty readers, you’re going to have to give them more to chew on.
Nick
Jan 28 2020 at 5:49am
None of the bloggers on this site advocate the state giving more to the poor than the rich. I think all would prefer more equality than less if it had no downside. The question that is really being asked however is would it be acceptable to forcibly take your neighbours child our of their school, that you couldn’t afford, to make your child feel better?
Thaomas
Jan 28 2020 at 11:24am
OK, but if the position is that it is just plane wrong to take from the rich to give to the poor for equality’s sake, then it does not matter whether the is a lot of inequality, or getting better, or getting worse, or whatever. The amount of inequality becomes relevant if like most liberals you are willing to trade off some growth (because the rich would have worked harder or innovated more) against some reduction in inequality.
Nick
Jan 29 2020 at 4:15am
I think we’re in agreement. My prior would be that any government policy that increases inequality should then do something else incredibly valuable to justify being legislated (currently huge numbers of proposals increase inequality). Policies that decrease inequality should rightly have their downsides assessed.
Generally I’m in favour of equality of opportunity but I am quite sympathetic to policies we could argue would exist under a veil of ignorance type argument.
robc
Jan 28 2020 at 7:12am
City of London?
That isnt a country, but the UK allows it.
robc
Jan 28 2020 at 8:40am
For those who don’t know (and I just had to look up the exact details), companies located in the City of London can appoint voters. Any business gets at least 1 appointment. They get a vote for each full 5 employees up to 50, and for each full 50 after that.
So up to 9 employees gets 1, 10-14 gets 2, 15-19 get 3, etc. 50-99 gets 10, 100-149 get 11, etc.
That is in addition to adult residents getting 1 vote each.
Phil H
Feb 4 2020 at 3:32am
Huh, that’s a good point. And of course, now that you mention city-states, Hong Kong has a similar system. Neither of these are seen as beacons of effective democracy, so I’m not sure they undermine my point, but yeah, good catch.
RPLong
Jan 28 2020 at 8:28am
Human emotions aren’t a policy issue. Taxes “to correct inequality” are. I suspect that is the reason why many economists choose to address taxes, poverty, and inequality, rather than emotion, envy, and inequality.
For that matter, the argument against allowing your emotions to get the better of you when you see people much better-off than yourself is that envy and jealousy tend to make people deeply unhappy, whereas self-compassion and mindfulness tend to make people happier.
Phil H
Feb 4 2020 at 3:41am
“envy and jealousy”
I swear this is *the* worst right wing argument. And that’s a hotly contested spot! This is the wing that wants its workforce to be aspirational and ambitious; it wants them to be incentivised by money. And yet when poor people say, yes, that’s right, we’d like some money please, what do they get? The evil twin synonyms: envy and jealousy. They mean literally the same thing as all the good words that businesses love, only they’re used as coshes. You can always do better than that argument.
TMC
Jan 28 2020 at 4:56pm
“This is a bit abstract, but I think if you want to argue that inequality is not bad, you should be working a lot harder to make the case.”
Inequality is the natural state of things. If you want to argue that the state has a right to take what I produce and give it to someone else, you need to prove your argument.
Chris
Jan 29 2020 at 2:42pm
1. Inequality is not driven by unequal labor, but by investment. If it was based on production, factory workers would be wealthy.
2. What part of inequality is ‘natural’? It is driven by a number of made up things from private ownership to state power to currency. Those are all inventions, none are natural. The natural differences between people are very limited. It’s the systems we’ve built that allow for great differences between a poor child in a developing country and a rich America CEO.
TMC
Jan 31 2020 at 8:30am
“Inequality is not driven by unequal labor, but by investment.”
Labor begets investment, and is controlled by the individual. The quality and quantity of labor varies greatly between people. Quantity is directly controlled, and quality can be directly controlled by improving one’s skills, or through the differences nature has endowed to us. Both are natural.
The natural differences are great between individuals, from strength, health, to intelligence and conscientiousness. Personal property is also natural. If I make tools I own, these are not given to me by the state, and existed well before the state, but these tools also magnify the differences between people. People very quite a bit, sometimes by nature, and other times by choice.
Also, very few people inherit wealth. Most successful people are self made. The wide variety of starting points for both successful and unsuccessful people indicate how much it it up to the individual to succeed.
Phil H
Feb 4 2020 at 3:37am
“If you want to argue that the state has a right to take what I produce and give it to someone else, you need to prove your argument.”
I agree with this! States definitely should be forced to make their argument – and those states with a free press are held to account, to some extent, by the media.
“Inequality is the natural state of things.” Maybe, but that’s not a good argument for anything. Nature’s terrible.
Mark Brady
Jan 28 2020 at 2:46am
“The Truth About Income Inequality
“Should we be worried about the wealth amassed by the so-called 1 percent?”
So is this an article about income inequality or wealth inequality? The two topics are certainly related, but they are not the same.
robc
Jan 28 2020 at 7:19am
Good point. I dont see much issue with income inequality, it is semi-reasonably associated with productivity.
The only problem with wealth inequality, imo, is wealth thru ill-gotten gains (or is that an income problem?). What is very clear is that the same income can lead to widely different wealth, so much of the wealth inequality is behavioral in nature.
Alan Goldhammer
Jan 28 2020 at 7:43am
I agree with this point as well. Definitional impreciseness is leading David down into a rabbit hole that is difficult to navigate. It’s also important to carefully define what is meant by income. If one is talking only about wages and leaving out the cost of living, things get very tangled. $80K/year in the SF Bay area may look good when compared to the median income across the US but the cost of living is far above the median. Let’s say that David is offered two faculty positions, one at University of Rochester and one at UCLA where the salary and benefits are equal. From a financial perspective, choosing Rochester over Los Angeles is perhaps a more rational choice and David would be able to save much more money in the long term (assuming he doesn’t have to replace his snow blower every couple of years).
Thaomas
Jan 28 2020 at 8:33am
Surely this must depend on 1) how the higher taxes on richer people are achieved — elasticity of work, innovation and savings must be different for different kinds of taxes — and b) what the greater taxes are used for. For example, would reversing the reduction in taxes collected from high income people (making the “Tax Cuts for the’Rich and Deficits Act of 2017” revenue neutral by raising personal income tax rates) in order to reduce the structural deficit harm lower-income people? Would moving from progressive taxation of income to progressive taxation of consumption be bad for lower income people?
robc
Jan 28 2020 at 8:45am
The yacht luxury tax, which was a form (badly implemented) of progressive consumption tax, hurt a lot of lower income people.
Although to be fair, I may be making a Bastiat-type seen/unseen error. If they stopped buying yachts and invested in capital instead, maybe the unseen lower income people helped more than offset the damage to the yacht industry.
But I doubt it in that case.
Thaomas
Jan 28 2020 at 11:33am
By a progressive consumption tax I mean one that taxes all kinds of consumption (income minus saving/investment). The base is (I-S/I) and rates are progressive. And yes I suppose there will be disagreements about what is savings/investment — some health care?, some kinds of education? — and some kinds of favored consumption — charitable contributions? home mortgage interest?
robc
Jan 28 2020 at 3:26pm
David Henderson suggested a good way to do it. Make the S an unlimited IRA.
My problem is that only works if you also eliminate the 59 1/2 age rule. So you can put an unlimited amount into savings tax free, you can take it out any time in the future, but it is taxable in the year you take it out.
The other problem is the current restriction on IRA’s being used to invest in a company you own. So you cannot invest your IRA in your own business. If we get rid of that rule too, that really makes your idea more tenable.
Thaomas
Jan 31 2020 at 10:08am
Yes, both the mandatory withdrawals and restrictions on additions.
I can see there might be need for some regulation of investments in own enterprise to prevent that becoming a way of disguising consumption.
Andre
Jan 28 2020 at 10:38am
Deep down, everyone is motivated by reproduction and survival.
The cries of “Inequality!” are couched as though they were about survival
(i.e., “‘Those people’ have so much while others [among us] are the edge of survival”) – which is no longer a significant issue in countries like the US –
when in fact they are about reproduction
I.e., either “Those people have more than I do and thus ought to have some taken from them and given to me, thus raising my reproductive odds” OR [more commonly] “I need to proclaim that some having more than others is unfair so I can gain a bit more status and thus raise my own reproductive odds.”
We know this is true because almost none of these individuals come close to giving away what they could to ensure others’ “survival.” In other words, none of them walk the talk.
Chris
Jan 29 2020 at 2:36pm
You seem to be ignorant to the number of people in the US living below the poverty line. A huge number of Americans are food, housing, and healthcare insecure and inequality is driving them farther from necessary resources, while exacerbating unequal educational and career outcomes. Furthermore, low income neighborhoods have higher rates of all kinds of harmful things from infant mortality rates to violent crime. Inequality most certainly is a survival issue for many people.
IVV
Jan 28 2020 at 10:50am
Isn’t the real risk, and what people are truly looking for, financial security? Doesn’t everyone, from top to bottom, just want to know that they’ll be able to afford tomorrow’s meals, have a bed to sleep in one more day, be able to maintain their health without losing everything? I imagine lots of anger and envy resulting from the problems of wealth inequality can be ameliorated if everyone can be guaranteed that they won’t just starve and live a life of misery.
Chris Wegener
Jan 28 2020 at 1:57pm
Chris Wegener
Jan 28 2020 at 1:59pm
That didn’t work. How about this:
Chris Wegener
Jan 28 2020 at 2:00pm
Try again:
nobody.really
Jan 28 2020 at 2:56pm
Truer words were never spoken. Oh, to think of all the times I WISH I’d had the wisdom to say this…
Comments are closed.