Three Cheers for Income Inequality
To what extent will the United States, or any other nation, profit by a concerted effort to redress inequalities of wealth? This is the question that I took up in my weekly column for the Hoover Institution journal, Defining Ideas.
The answer depends on the choice of means. Voluntary forms of redistribution through major charitable foundations pose no threat to the accumulation of wealth. Indeed, they spur its creation by affording additional reasons to acquire levels of wealth that no rational agent could possibly consume.
Forced transfers of wealth through taxation will have the opposite effect. They will destroy the pools of wealth that are needed to generate new ventures, and they will dull the system-wide incentives to create wealth in the first place. There are many reasons for this system-wide failure.
First, the use of state coercion to remedy inequalities of wealth is not easily done. The most obvious method for doing so is by creating subsidies for people at the bottom, which are offset by high rates of taxation for people at the top. The hope is that high taxes will do little to blunt economic activity at the high end, while the payments will do little to dull initiative at the low end.
But this program is much more difficult to implement than is commonly supposed. The process of income redistribution opens up opportunities for powerful groups to secure transfers of wealth to themselves. This does nothing to redress inequalities of wealth. Even if these political players are constrained, there is still no costless way to transfer wealth up and down the income scale.
The administrative costs of running a progressive income tax system are legion. Unfortunately, that point was missed in a recent op-ed. Writing in the New York Times, Cornell economist Robert H. Frank plumped hard for steeper progressive income tax rates as a way to amend income inequality. Frank does not understand that taxing the top one percent even more means less wealth and fewer jobs for the rest of us. I elaborate over at Defining Ideas...
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May '11
Re: Three Cheers for Income Inequality
As an empirical matter, the standard of living for the middle class and the poor always rises proportionately to the degree of wealth inequality. This is not surprising, since “wealth inequality” simply means the accumulation of capital by the investor class. Look at any society where there is little or no wealth inequality (the nearest one is about 90 miles off the coast of Florida) and you will see misery and squalor. Ask the residents of anyplace where people are struggling what they want most, and they will tell you they want some big, rich corporation to come there and set up shop. They know that is what will create jobs and invigorate the economy. Hooray for wealth inequality!
May '11
Re: Three Cheers for Income Inequality
Professor Epstein, what I always wonder is how anyone can disagree with this way of thinking, it is demonstrably correct.
Apr '11
Re: Three Cheers for Income Inequality
Stu, the best explanation of the psychology of it is in Thomas Sowell's "Vision of the Anointed".
Professor Epstein - - - as usual the example of Japan is ignored. Japan certainly has the least income inequality of the highly developed countries. Much of this is explained by the lack of diversity. Hand in hand with this is the tremendous familial and social pressure to work hard and for the good of society. Of course there was plenty of coercion in the past, but the work ethic remains.
Edited on Nov 8, 2011 at 7:14amNov '10
Re: Three Cheers for Income Inequality
One thing that is usually overlooked both by income-redistribution plans and by critiques of them --and that I find most disturbing- is the effect upon society. Such plans undermine the traditional horizontal relationships --the ties that bind us to each other, the local institutions that gather us together-- and replace them with vertical relationships, that atomize the we of our communities and bind us as individuals to the state. The egalitarians inevitably come to see the state as the engine of justice, and traditional institutions as the enemy.
Oct '10
Re: Three Cheers for Income Inequality
Just to clarify, Robert Frank advocates a very steep progressive consumption tax.
He thinks inequality of consumption is much more troubling than inequality of income. He has an interesting theory as to why, although I don't buy into it.
But the distinction is important because if I had to choose between a progressive income tax and a progressive consumption tax, I would prefer the latter.
Feb '11
Re: Three Cheers for Income Inequality
Nov '10
Re: Three Cheers for Income Inequality
Israel P. · Nov 8 at 8:44am
Possibly but not likely given history. If the bureaucrats get more money to redistribute they will increase their ranks on the pretense that they have more "work" to do in redistribution. History is clear bureaucrats beget bureaucrats.
Dec '10
Re: Three Cheers for Income Inequality
A question for Mr. Epstein (or anyone else):
During various American booms of economic growth-- the mid 19th century, post WWII-- there was ample growth but less income disparity. How do you explain this?
Related: Do the eye-popping levels of income disparity we currently enjoy themselves undermine the "horizontal" ties that bind us as a community, and make us less likely to engage in the collective self-sacrifice that will be necessary to make our nation solvent?