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.)