I'd like to discuss, and possibly stimulate concern for, an economic paradox which has grabbed my attention for some time now. In talking to an elder just recently, I was reminded of the heightening trend in household income differentials. Through casual conversation, one may already be aware of an increasing variance in household income. However, in pursuit of intellectual curiousity, one may wonder what exactly those figures have been overtime. The chart on the right will shed some light on that.
To be honest, it doesn't appear quite as disturbing as most political scientists or historians make out. However, there does seem to be a trend nevertheless – most obviated by the 10th and 20th percentiles' constancy over the last 40 year period and the 95th percentiles' near 160% increase. However, this is not the crux of what I wanted to talk about today.
What I wanted to talk about concerns a resolution to this matter. What should be done? This question assumes, of course, that widening income disparities are malicious to society in some way. Indeed countries with wider gaps in income are those highly correlated with high crime, inflation, often guerilla warfare, governmental corruption or disorder on some levels, and many more civil disfunctions of the sort. The relationship between the two remains unresolved – meaning is it the higher income disparity that causes social disorder, social disorder that causes high income disparity, or are both an effect of a third unaccounted factor? Some have tried finding good in the recent financial mess, claiming that a recession of the sort is needed to re-synthesize different socioeconomic classes, much like the Great Depression of the 1930s did. Economists such as Armine Yalnizyan have disagreed with such a notion claiming that “Income polarization always gets worse during recessions.” Nevertheless, for the purposes and scope of our argument, we will rid ourselves of the responsibility of answering these often difficult and irresolute questions and assume (crossing our fingers justifiably so) that most social scientists are right in claiming that widening trends in household income is indeed disturbing.
So once again, to reiterate our concern: what must be done to reverse the growing and seemingly irreversible trend in household income differentials? Most economists agree that redistribution initiated by some form of government intervention is necessary. However, any society that values civil liberties will necessarily avoid any form of forceful government intervention. Ayn Rand once held, for instance, that a government can be the most dangerous threat to man's rights: it holds a legal monopoly on the use of physical force against legally disarmed victims. And indeed she had a point. People who hold the position of these economists – namely those who favor forceful redistribution – must commit to a position that violates libertarian principles entailed by Western political philosophies. Additionally, such redistribution can eliminate incentives for economic productivity.
We arrive at a second possible resolution: differential tax rates varying with respective socioeconomic positions. Such resolutions may or may not work. Legislators may want to avoid what mathematicians would call piecewise functions. If for instance, tax rates were a function of income (say increasing as income increased, or decreasing as income decreased), then any corner solutions may once again encounter the same problem as the previous: elimination of economic productivity. What exactly does this mean? For instance, suppose a doctor and lawyer couple collectively make $260,000 annually in household income. Now suppose tax law has it such that those households making over $250,000 will pay 50% income tax annually (meaning $130,000 for our doctor-lawyer couple) and those below $250,000 will pay less than or equal to 25% of their income. Suppose now the lawyer makes $80,000 annually – meaning if she were not to work, the couple would earn $180,000 annually and qualify for the under $250,000 income bracket. It follows that the lawyer's quitting becomes economically profitable for the household by $5,000; since tax on $260,000 would be $130,000 and tax on $180,000 would be $135,000. An economy will clearly be disadvantaged by the lawyer's quitting his or her job. Nevertheless, the lawyer can kick up his feet everyday, not work, and expect his or her house to rack in an additional $5,000 annually. Such economic paradoxes implied by certain tax schemes exist, and indeed hold potential to create what economists would call dead weight loss, or unfulfilled economic potential. Nevertheless, such tax schemes are far from perfect in exclusively resolving our problem at hand: increasing income differentials.
This is where I personally return to the drawing board. What can be done to exclusively remedy this trend without causing unintended havoc? To this day, no one (to the best of my knowledge) has succeeded in answering this preceding question.
It's a very interesting dilemma, and one that seeks a creative response.
ReplyDeleteIf I remember my Rand'ian years right (I think it's something every self-confessed 'thinker' or, rather, 'public intellectual', has gone through) I think it would initially involve a more thorough questioning of that correlation between unstable societies and what you term the 'income differential.'
And obviously the question of institutional morality would also have to be discussed (should the country try and help those lower income groups? Especially if they've not had equal opportunities in the past?)
So yeah, interesting paradox.
The economic discrepancy is obviously growing-and if we were to modify the gap at all, the change would be slow, results appearing long after Obama leaves office. I wish I could say charitable donations by big CEO companies should be mandatory, but the oversight on addendum agencies dealing with this excess money ensues. And besides, it's not really charitable if it's government mandated. It's an interesting question...if only we all lived in Adam Smith's age-I trust he would write a book along the lines of: "The Poverty of Nations."
ReplyDeleteVery thought-provoking article. One thing to point out is that the tax differential system does not work that way. For example:
ReplyDeleteFor every dollar over the #250,000, the new tax rate applies. For my first $250,000 earned, I pay only 25%, but on every dollar beyond that, I pay 50%. Thus the paradox of the differential tax rates is relieved.
I happen to find both of the proposed solutions to fail anyway. The best solution: Gospel of Wealth. :]
I think you just further proved the point that we need a simplier tax system. You're a smart person, but you didn't understand that higher rates only apply to income above a certain level and not retroactive to income below that level. That's what makes the tax graduated. The real solution is a flat tax. I mean if the guy running the IRS doesn't know how to pay his taxes, how are we supposed to?
ReplyDelete