During the past half-century, our policymakers have viewed members of the private sector as medieval serfs, whose primary function is to provide the economy a pace of growth to enable the all-important public sector to expand without boundaries. Federal fiscal, debt management, tax and costly regulatory policies are apparently driven to serve welfare, entitlement and public employee-expenditure expansion.
THESE SWEEPING AIMS are justified under the guise of fairness, equity and justice to be implemented by reducing income and wealth inequalities, either by taxation or by regulation. It is as if the private sector exists only to fulfill the expansion aims of the public domain, entirely opposite to that of the obvious intent of our Founders.
This effort has its costs: Suffocating tax and regulatory policies reduce investment incentives, and hence the nation suffers a loss in national output, while the private sector attempts to adjust to these shocks. There can be no assurance that these losses can be recovered. Other costs are inefficiencies because of misallocation of society’s scarce resources as they are misdirected to questionable uses.
A parallel effect of these redistributive efforts has been, rather than reducing income inequality, an ironical increase in inequality. Launched by President Lyndon Johnson as the War on Poverty, this vast program to help equalize wealth and incomes has been, on average, a monumental failure. This implies that instead of increasing taxes on the few that pay them, we should reduce their burden.
The flood of recent data purporting to show an increasing income gap between rich and poor leads to misleading and very erroneous inferences. But on its face it adds further evidence to support the conclusion that the redistributive effort has been a political failure. What kind of evidence does it take to be convinced of this conclusion? Indeed, when the famous folklorist Pete Seeger wrote the poignant song Where Have All the Flowers Gone? he inserted the plaintive query, “When will they ever learn?” Yes, when will they ever learn?
THE INCREASES IN income tax progressivity of our tax system have been well-documented. But the growth in government regulatory costs has only recently been recognized. For example, Wayne Crews of the Competitive Enterprise Institute, in his latest compendium on federal regulations (Ten Thousand Commandments), alone estimates that their compliance and economic impact costs total approximately $1.9 trillion annually, a sizeable quantity when compared to our annual gross domestic product of $16 trillion. This results in a remarkable comparative relationship of such costs amounting to one-eighth of our national output. These costs virtually are dead-weight losses to the economy with no significant benefits to gross product.
NOW COMES THE famous French economist Thomas Pikettey with his new book Capital in the 21st Century, espousing the theory that since the earnings rate on private capital investment is virtually always higher than the growth rates of income and output, this must be the cause of the increases in income inequality.
Pikettey argues that the divergence is inevitable and that the only solution for reversing growing inequality is more steeply progressive income and wealth taxes.
Wow! This is the traditional Marxist, leftist, liberal prescription. No persuasive, well-thought-out arguments or relevant empirical data are offered. According to Pikettey and many others, the mere plausibility of this hypothesis is sufficient to establish its validity. Of course, this is far from being a convincing argument.
IMPORTANT CRITICISMS of this idea follow. First, a major premise of the argument is that comparing income distributions (an income distribution is a table showing the percentage of income captured by people in each income category) between two years and drawing inferences of increasing or decreasing incomes among income classes is a valid form of reasoning.
Generally, it is not. Between time periods, incomes of people jump from one income class to another (up or down). Over time, people are added to the sample, and others are dropped. These factors distort the inferences that are being drawn. To be precise, to draw valid inferences about changes in inequality one must have a sample where, at the least, the people in the sample are the same in each time interval. Of course, this condition implies no change in inequality. But this is all we can establish with such data. Obviously, to infer that inequality has changed is dangerous.
Second, keeping the Pikettey book in mind, in his earlier statistical studies of inequality in the United States his data show rising income inequality, even though vast efforts through increasing progression in tax rates prevailed over the sample period. But according to Pikettey, inequality was supposed to decrease, not increase. Since the proof of the pudding is in its eating, his proposed tax policy to correct inequality does not work.
EXPRESSED IN LOGICAL terms, under conditions prevailing during the latter part of the 20th century, the theory is refuted. Further reinforcing this conclusion is further evidence of increasing inequality provided by data from the recent recession.
Of all the sweeping social changes our nation has been subject to during the past half-century, the view that the private sector serves as the handy servant of a rapidly growing public sector must be the most significant, and the one most fraught with peril for the nation. And of all recent social engineering efforts, the attempt to reduce inequality by redistributing income must rank as the most ambitious failure of all.
When will they ever learn?
(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)