Want Less Inequality? Tax It

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British economist Arthur C. Pigou, friend and contemporary of beloved John Maynard Keynes, eventually not only came around to the Keynesian logic, but also expanded on the common-sense philosophy to promote social balance and checks with the gentle, invisible hand of the Public. By incentivizing what benefits the downtrodden (perhaps with subsidies) and disincentivizing poor practices (by taxing rampant, unregulated profits), a more reasonable parity between the classes could be reached, stimulating economic growth and benefiting everyone.

This doesn’t have to be a ‘redistributive’ scheme that pits neoconservatives against progressives. Indeed, such a rational, gradated, and bracketed system makes sense to anyone who believes in the American traditions of pragmatism, equality, openness, innovation and opportunity.

Via the American Prospect by Liam C. Malloy and John Case

But the conventional strategy for fighting inequality—far higher taxes on the rich—usually rests on a foundation of fairness, and the question of what’s fair and what’s unfair turns out to cut different ways, depending on your point of view. You may find it unfair that the very rich take in so much more than others. But somebody else might wonder why the rich should be taxed so heavily. Don’t they already pay disproportionately more than everyone else? These arguments quickly hit a dead end. That may be why befuddled Democrats and Republicans in Congress wrangle fruitlessly over top tax rates—39 percent, 35 percent, or even lower—that have already demonstrated negligible effects in reducing inequality. No one even discusses top rates that might make a difference. (We’re referring, of course, to marginal rates, rates that apply only to income over a certain threshold, like $250,000 or $1 million.)

Pigou may be able to help us cut through the confusion. Viewed through a Pigovian lens, today’s highly skewed income distribution imposes three sorts of costs on the rest of us.

  1. As the economy grows, the rich get nearly all the gains.
  2. Many talented people focus narrowly on getting richer, to the exclusion of activities that might be more beneficial to society.
  3. As a group, the rich can use money to pursue political power and influence well beyond their numbers.

Assuming that a highly skewed income distribution results in negative political externalities, Pigou’s response would be quick. Slap a tax on vastly unequal incomes, and watch the externalities shrink.

A Pigovian tax on the rich might look on the surface like any other progressive income tax, but there are at least three philosophical differences. Its purpose is to reduce inequality, not to make everyone pay a “fair share.” This goal cuts through the complaint that the rich are already paying far more than their share in taxes.

A Pigovian tax seeks to change incentives. That is, its goal is to alter the pretax distribution of income, not just the after-tax distribution—to discourage people from seeking to earn exponentially more than their fellow citizens. With higher tax rates, a job in finance might lose some of its appeal to talented young people. U.S. chief executives might content themselves with salaries averaging 20 times the typical worker’s earnings—the ratio in 1965—instead of 351 times the average, as was the case in 2007. Incidentally, past experience suggests that even with much higher tax rates, plenty of people would pursue careers in finance, corporate management, sports, entertainment, specialized medicine and law, and other well-paid fields. These occupations would still offer a high standard of living and above-average nonmonetary rewards. The most successful practitioners might earn $100 million or more in salary and capital gains and—depending on rates—pay taxes of $50 million or more. That would still leave them with a sufficiently comfortable lifestyle.

A Pigovian tax on inequality is not designed to equalize outcomes. It seeks only to reduce inequality from a level that threatens democracy to a level compatible with democracy, while still encouraging plenty of work and innovation. There would still be super-rich Americans, just not quite as many.

In fact, the only people who would have a problem with this are the unpatriotic wealthy who want unmitigated greed, and see any form of taxation as punishment. But taxation is not and has never been a punishment. Fines are punishments. Taxation is a civic responsibility to help support the system that we all exist in, are part of, contribute to, subsist on, etc…

For a more in-depth description, graphic visualization, and examples of how this might work, read the entire article from the American Prospect.

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  • http://twitter.com/TedHeistman Ted Heistman

    I wonder if there could be a “clock work organge” effect. Maybe progressive taxation would prevent that. You know hoodlums just doing random home invasions on rich people.

    The Swiss seem to instinctively avoid ostentation. Seems like a smart move not to draw attention and jealousy. Doesn’t seem to be an American thing.

    • Liam_McGonagle

      That’s because America is spoiled rotten for resources and Switzerland is a barren, unproductive rock.
      “Muineann ga seift,” as they say, or “Poverty teaches resourcefulness.” Until the 18th century Switzerland’s primary export was mercenary troops, until they learned you could kill a whole lot of people much faster with dodgy financial vehicles.

      Believe me, I’ve worked with Swiss companies, and from my personal experience there is no greasier business culture on earth than the Swiss. 60 years on and you practically have to detonate a nuclear bomb under them to pry loose any of the art work they looted from Holocaust victims.

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