Severe attempts at income redistribution flatten the income pie

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Long favored by advocates of income redistribution, recent data show that stiff, progressive income-tax structures do not yield promised reductions in income inequality; but because of the resulting misallocation of society’s resources, produce instead a lower level of national income than would otherwise be attained.

This is a tragedy. Even though such a tax fails to achieve its goal, it is downright harmful. Economists maintain that such taxes favor less business investment, and especially fewer risky investments such as Apples, Intels and Googles, with resulting lower employment.

YET, DESPITE THIS failure over the past seven decades, our nation has enjoyed growing living standards. What is more important, this growth has benefitted members of all income classes (see Robert Rector’s July 26 contribution at nationalreview.com for quantitative evidence.)

Contrary to beliefs of politicians and journalists, a rising tide does lift all boats. We do not attempt to identify the causes of these improvements; well-meaning people may debate this issue indefinitely. It is remarkable that our economy, despite grave government-imposed distortions to incentives, has the resilience to uplift so many people to real income levels beyond comprehension by their ancestors.

Income-redistribution advocates seek to reduce inequality because, in a “just society,” each person should enjoy a decent standard of living. But is reduction in inequality really associated with increases in living standards, especially for the poor? At the same time, we want growth in real incomes for all citizens.

If such growth and adequate living standards are that important, should not our major focus be on those targets, rather than reducing inequality? In fact, if the aim is overall income growth, increases in living standards will follow since they are associated.

There is no recent U.S. evidence, however, linking declining inequality with burgeoning national income, although there are contradictory data. Specifically, during the lengthy period from 1952 to 1988, income inequality as measured by Thomas Piketty and Emmanuel Saez (Quarterly Journal of Economics, February 2003) was trending up, not down, while national income was growing.

Evidence following this period confirms a continuation of this trend. While inequality was increasing, real incomes of the poor, rather than decreasing, were rising; and if redistribution efforts had not been attempted, the increases would have been even greater!

Nor does evidence from changes-in-wealth studies help redistribution efforts. For example, the Pew Research Center reports that the wealth gap between median wealth holdings of white households and black households continues to widen. The ratio of median wealth of whites to blacks increased from about 10 in 1984 to 20 in 2009 (The Wall Street Journal, July 26). A similar result holds for white and Hispanic comparisons. Even though the study is fraught with misinterpretations and other flaws, it does confirm that redistribution policies are misfiring.

Because such fruitless efforts have been harmful to income growth, isn’t it reasonable to consider switching our focus from reducing inequality to one of growing our national income – to raising overall living standards? Economists generally agree that reducing progressive taxes and needless government regulations can trigger much higher levels of national income.

THIS RAISES A tantalizing prospect: Imagine the growth in overall income that would be forthcoming if risk-taking investors were freed from their excessive government burdens. Whether, as a result, inequality increases or decreases is of no relevance if overall standards of living are rising faster than previously.

Ardent redistributionists, however, remain adamant. They suggest that the cure for redistribution failure is the imposition of even steeper tax rates. But this action will not only slow further our income growth and risk extended stagflation, it also acknowledges the failure of current costly redistribution programs.

Politicians assert that their only reason for supporting progressive income taxes at state levels is the fervent need to reduce income inequality (The Wall Street Journal, March 26). Despite failed efforts to cut income gaps, this obsession with decreasing inequality becomes more difficult to understand. While the reader may be aware of other plausible reasons for this compulsion, an important one is the emotion of envy. Envy is not all bad. Controlled envy is useful.

Many citizens effuse the emotion of unbounded envy at the success of others. For them, reducing inequality becomes an obsession. Excessive envy, however – an attitude problem – is harmful. Left unchecked, it converges to hatred (some journalists, for example, cannot hide their hatred of people of means).

Instead of emphasizing the aim of lifelong self-improvement, and the pleasures of reaping rewards from work and personal sacrifices, the envy-obsessed individual eagerly embraces progressive taxes. At the risk of appearing presumptuous, becoming obsessed with envy and brooding over a neighbor’s success, as well as society’s wealth disparities, can lead one to not only misspend valuable time, but to miss rich opportunities for further personal development and financial rewards – some of the costs of envy.

Exuberant envy remains a stubborn obstacle to the softening of such tax and costly regulatory policies. It prompts us to focus on the wrong goal – the elusive aim of reducing inequality instead of raising overall living standards.

Further, the widespread belief that less progressive taxes would only add to inequality is a myth. With either more or less progression, we have growing inequality anyway. Making matters even more difficult, extreme envy must also be a major factor behind recent hysterical criticism of executive compensation.

MODEST ENVY leads to benefits for the individual and society. It stimulates citizens to emulate the status of the envied parties. It can motivate people to develop their human capital, and attempt to seek jobs that are more rewarding. It also encourages them to develop innovations, work harder and save more from their incomes, yielding more societal benefits. In fact, income inequality may actually reinforce self-improvement incentives, a socially beneficial result.

We can suppress excessive envy by worrying less about our neighbor and concentrating more on achieving personal goals. Abandoning failed income-redistribution programs would not only help achieve substantial advances in national income and living standards, but in individual happiness as well.

Remove tax and regulatory disincentives that weigh on us, and drastically simplify the tax code. Moreover, the goal of increasing overall living standards recognizes that families cannot survive on statistical “reductions in inequality.” Increases in real income are required.

(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)

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harley_52
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harley_52 08/21/11 - 09:27 am
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I love reading Dr. Beranek's

I love reading Dr. Beranek's posts because he is one of those rare eggheads who not only demonstrates a brilliant grasp of his own field of learning, but also a firm understanding of the ways of the real world and enough common sense to separate the esoteric and theoretical from the practical and proven.

I think the best paragraph from this superb piece is this.....

"We can suppress excessive envy by worrying less about our neighbor and concentrating more on achieving personal goals. Abandoning failed income-redistribution programs would not only help achieve substantial advances in national income and living standards, but in individual happiness as well."

Success or failure in life is largely determined by the sum of results we get from personal decisions we make each and every day. We decide whether to get up in the morning, or lay in bed. We decide whether to go to school, what to study, whether to do our homework, how to spend our free time, whether to get a college degree, and whether to serve in the military. We decide whether to obey the law, weather to attend church services, whether to save our money, whether to invest, whether to get married, whether to have children, on and on, and on. You get the idea.

We are the champion, or the victim, of our own decisions and our own endeavors. The only reason to worry about what others are doing is as a comparative standard for measuring our own success or failures resulting from the choices we've made. We can learn a lot from that. As we improve our own lot in life, the community is improved and better communities make for a better nation.

We do a tremendous disservice to ourselves, our communities, and our Nation when we support the use of government force to steal from those who have worked hard and made the right decisions and distribute the fruits of their hard work to those who have repeatedly chosen the wrong path. Further, we encourage the proliferation of bad choices when we reward failure and punish success which is what we do when we forcibly redistribute income from the successful to the failures and the lazy.

david jennings
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david jennings 08/21/11 - 10:05 am
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I too throughly enjoyed Dr.

I too throughly enjoyed Dr. Beraneks column.After reading it at least twice I came to the idea that the distribution of opportunity is always been there.If we make the good choices the need for redistributiion is removed.

dougk
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dougk 08/21/11 - 10:25 am
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Notice how Dr. Beranek stops
Unpublished

Notice how Dr. Beranek stops sprinkling his comments with sources once he launches into his diatribe on "wealth envy" and its supposed correlates? I would have liked to have seen just one empirical source....but of, of course, there aren't any. "Wealth envy" is a politically contrived notion which is used in an attempt demean the political opposition.

dichotomy
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dichotomy 08/21/11 - 11:04 am
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I don't think something that

I don't think something that is painfully obvious needs any empirical source. Wealth envy is much too polite a term for what is really going on. We should be more verbose and call it the "give me some more of somebody else's money" syndrome or the "I could go make it myself but if I wait long enough the government will take it away from somebody and give it to me" philosophy. "Envy" is much too polite a term. "Envy" implies a feeling without action. Attempting to take what belongs to others is an action and goes way beyond envy. Boiled down to simple terms it is really robbery.

FalseHopeLooseChange
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FalseHopeLooseChange 08/21/11 - 11:07 am
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It all comes down to primeval

It all comes down to primeval philosophy preached by the liberal left to the self-inflicted economically, socially and morally disadvantaged masses: "The rich stole what was rightfully yours so they need to give it back to the peoples they stole it from".... And the masses really believe it.

dougk
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dougk 08/21/11 - 11:24 am
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Exactly my point, Dichotomy:
Unpublished

Exactly my point, Dichotomy: "If it exists in my/our head/s, it must exist." Which is consistent with the anti-intellectualism which appears to becoming more pervasive these days.

billyjones1949
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billyjones1949 08/21/11 - 11:33 am
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I don't know how smeone could

I don't know how smeone could believe that the rich stole what belonged to someone else. The worked and invested in ideas that the masses purchased. They earned it.
I like this part of the article, " real incomes of the poor, rather than decreasing, were rising; and if redistribution efforts had not been attempted, the increases would have been even greater!"
They went down because rather than work for what they get they held their hand out and received something for doing nothing. How could anyone feel sorry for those kinds of people with that type of attitude?

hounddog
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hounddog 08/21/11 - 12:17 pm
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billy, 'They went down
Unpublished

billy, 'They went down because rather than work for what they get they held their hand out and received something for doing nothing. How could anyone feel sorry for those kinds of people with that type of attitude?'
You mean like the Obama supporters?

harley_52
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harley_52 08/21/11 - 12:37 pm
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"Envy" exists allright,

"Envy" exists allright, there's no doubt about it. You can read it in posts here all day, every day. To the extent it's so widespread and deeply seated, it is mainly the result of left-wing politicians convincing the lower socio-economic classes and racial minorities that the only reason they aren't "rich" is that whitey stole all the money.

Every time you hear a left-wing politician talk about any social issue, you can be assured the purpose is to build envy and resentment between the "poor" and the "rich." When that left-wing politician is also an ethnic minority, you can bet they'll add race into the equation. For the Jesse Jacksons, the Maxine waters', the Al Sharptons, and yes, even the Obamas, racism is a force multiplier when creating envy and resentment among those whose votes you're trying to lock up by misleading them into thinking they're the victims of the greedy, white, rich people instead of being victims of their own poor choices.

faithson
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faithson 08/21/11 - 02:51 pm
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'Lies are often much more

'Lies are often much more plausible, more appealing to reason, than reality, since the liar has the great advantage of knowing beforehand what the audience wishes or expects to hear'. First of all 'wealth distribution' is not the priority the author makes it out to be. Asking the wealthiest among us to pay taxes at the same rate as the proletariat do is NOT 'envy', unless it is to your advantage to make that argument. By many measures the working class today are living on wages that have not shown upward appreciation for the last 30 yeas, while the financial class has seen their wages skyrocket. The MYTH that taxes and over regulation are at the root of our financial peril are fictitious. All these editorials do is exactly what I quoted above: "wish and hope to HEAR"

allhans
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allhans 08/21/11 - 04:29 pm
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I

I

CorporalGripweed
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CorporalGripweed 08/21/11 - 05:51 pm
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"The Pie" concept can best be

"The Pie" concept can best be explained by comparing the left's version with the right's version. The left wants the pie equally distributed so there is parity among those who get a piece. The right wants the pie to be bigger so that everyone gets a bigger piece.
It's not a zero sum game. And if you don't understand the zero sum principle, stop reading now. If you do,then you understand precisely what I mean.

Vito45
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Vito45 08/21/11 - 06:20 pm
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Corporal, even if we did cut

Corporal, even if we did cut up the pie evenly, those wanting that bigger piece would gobble thiers up and soon be eyeing what you have left.

harley_52
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harley_52 08/21/11 - 06:20 pm
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That's the basic theoretical

That's the basic theoretical difference between capitalism and socialism, CorporalGripweed, but in fact that's not what these "progressives" want at all.

Really, they want control of the whole pie and the ability to distribute it as they see fit. They believe people are too stupid to have a full share of the pie so they want full control so they can keep a huge share for themselves, then dribble small pieces around to the "little people" from whom they demand not only gratitude, but absolute loyalty and support.

If you need an example of their views, look no further than the Presidential royal family's vacation in Martha's Vineyard while the "little people" worry about their electric bills, gasoline for their cars, and the jobs they've lost due to Obama's disastrous economic policies.

augusta citizen
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augusta citizen 08/21/11 - 06:57 pm
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"Thou shalt not covet..."

"Thou shalt not covet..."

dougk
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dougk 08/21/11 - 08:14 pm
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Thank you for your insightful
Unpublished

Thank you for your insightful comment, augusta citizen.

madgerman
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madgerman 08/22/11 - 07:08 am
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The royal family of England
Unpublished

The royal family of England didn't get to their station in life by income distribution. The writer asserts that lowering regulations will insure that all players will gladly play fair. I wonder if the wall street speculators would play fair if we reduced regulations governing stock trading? Or better yet if we get rid of banking regulations will your bank (which you must have to live in this country today) play fair if they were unregulated? I believe that if we look back in history at the American Barons of the past century, we will see just what income inequality produced, and it isn't a work force that was happy or healthy but it did make a few royal American royal familys with the ability to use their wealth to build a country they could and did actually rule.
I wonder what the writer thinks about the influence lobbyist have on our political system and the distribution of wealth? They obviously do not represent the common man but they sure influence where taxes go.

burninater
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burninater 08/22/11 - 10:36 am
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Dr. Beranek, please tell me

Dr. Beranek, please tell me this is not what passes for critical analysis at the University of Georgia.

You have provided no evidenciary basis whatsoever for your primary claim, that "...recent data show that stiff, progressive income-tax structures do not yield promised reductions in income inequality".

You do not provide a case of a "stiff, progressive income-tax structure" designed to reduce "income inequality". I presume you are insinuating that the U.S. has had such a tax structure since 1952, based on one of your "recent" datums? The U.S. tax structure is neither stiff nor designed to reduce income inequality.

Furthermore, why are you basing your argument on a data range ending in 1988? Exactly WHAT does the data say for the subsequent 24 yrs to cause you to withold that evidence from your argument? Please tell me this is not your "recent" data.

I would love to see a guest column from an active, not emeritus, professor at the University of Georgia discussing the merits of the above editorial. I would personally be embarassed, as an active faculty member, to allow an argument this poorly reasoned to stand as a testament to the quality of teaching by the University of Georgia economics department.

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