Today we’re going to talk about income inequality. Let us begin with a famous parable from world-renowned philosopher, Peter Singer.
“While wearing an expensive, Italian suit, you come upon a pond where a child is drowning. Do you risk ruining this fine, tailor-made suit by jumping into the pond to save this child? And if you decide to save this drowning child, why did you even buy the suit in the first place when you could have just used that money to save a child in poverty? Of course, a rich man’s Italian suit is worthless to society. The value of a dollar given to a poor child is far greater than a dollar consumed by a rich man to buy an Italian suit.”
The decision to tax the rich more and redistribute their income would be obvious if the choice were simply between the useless consumption of the rich and the incredibly necessary consumption of the poor. However, this compromise is far from reality.
What many Americans are failing to recognize is that the top 1 percent of earners invest rather than consume the majority of their income, and this investment creates indisputable value for consumers and wage earners across all income levels. Reducing the threat of higher taxes on the top 1 percent will benefit the economy overall by increasing risk-taking, accelerating the accumulation of equity needed to underwrite risk and avoiding inefficient squandering of tax dollars by the U.S. government.
The redistribution argument usually begins in 1979, when the inflation rate was at 13.3 percent and interest rates were at 15.5 percent. Even though the poverty rate was rising, no other period in American history had seen such an even economic distribution. However, during the 1970s, the American economy was in terrible shape. This shared misfortune among Americans paved the way for the election of Ronald Reagan and 25 years of lower interest rates, lower inflation, and high economic growth.
Despite the uninterrupted recovery over the next two decades, the Piketty-Saez report (a cornerstone for redistribution fanatics) claims that during this period, the rich got richer, the poor got poorer, and “only a relatively small number of Americans benefited from the economic booms.” Because the Piketty-Saez report only evaluated pre-tax market income, their conclusions are empirically wrong.
The report did not consider non-cash compensation, such as employer-provided health insurance, pension contributions, Social Security payments, Medicare and Medicaid and hundreds of other means-tested government benefits.
Thankfully, in 2013, a new study (you can use your PioneerWeb login info to access this study via Summon@DU) conducted by economists Philip Armour and Richard V. Burkhauser of Cornell University utilized U.S. census data to account for all of these noncash compensations, as well as household size. The results are radically different from the Piketty-Saez report.
Between 1979 and 2007, the bottom quintile of Americans experienced a 31 percent increase in income (adjusted for inflation)—not a 33 percent decline that was found in the Piketty-Saez study. The income of the second quintile, commonly referred to as the “working class,” rose by 32 percent (adjusted for inflation)—not by 0.7 percent. The middle quintile, America’s middle-class, enjoyed an increase of income by 37 percent (adjusted for inflation)—not 2.2 percent.
Nowhere, at any point in history, has freedom and equality of outcome coexisted. In America, the innovator, the startup entrepreneur, the creative and persistent win out—and these types of individuals produce enormous income inequality.
Prizes are not equal because in our American system, consumers reward the people based on the value they add to our economy and to our society. Some individuals have the ability to add extraordinary value, and others do not or will not.
The rich do not take a large share of the national income; they bring it. Yes, compared to the other 34 OECD member countries, the U.S. median income is 24 percent less equally distributed. However, our per capita GDP is 42 percent higher, our median household wealth is 210 percent higher and our median disposable income is 42 percent higher than the other OECD countries. Thus, we can either give up 42 percent of our disposable income in order to tax the rich more, or we can lay aside the politics of envy and stop distorting economic facts. You make the choice.
