Is There an Ideal Amount of Income Inequality?
m.nautil.us
m.nautil.us
Is there an ideal amount of productivity inequality?
Even with 100% tax rates, the productive can find dimensions where it is possible to earn more, usually fame, status, non-taxable goods and political power.
Of course pure rent-seeking is pretty rare, and most middlemen do provide at least some value e.g. doing market research and helping interested parties find each other. But in some cases they gain an entrenched position and start taking larger cuts purely because they can. An ideal free market would correct that through emergence of a competitor, but in the real world that is often prevented through lobbying for regulations in favor of the rent-seeker.
Plus, as the population of western world is aging and there are more and more old people and less productive young people, the rent-seeking will only get worse. Much more people will be retired and will depend on getting cut from productive working people who will be squeezed more and more (higher taxes, longer hours, lower or stagnating wages). This can be alleviated to a degree by western corporations being global and exploiting cheap labour in third world but even that will be exhausted once the developing world catches up to western standard.
The changing demographics are certainly a problem, but assuming the population trends continue, today's young people aren't particularly worse off. Their pension contributions may be used for more than one old person, but once they become old themselves, the next younger generation will be in exactly the same situation.
"In economics and in public-choice theory, rent-seeking involves seeking to increase one's share of existing wealth without creating new wealth." (My emphasis)
We live in a time where those that take most, likely need it least and also often take from those that need it most, but often have least.
There's quite a bit of effort that goes into selecting a good place to invest. And, there's also a whole lot of risk involved. Look at Y Combinator, or other VCs and angel investors, for example. If investments count as "rent-seeking behavior", eliminating it would nearly destroy the economy.
People often fail to see the value of deferred expenditure of money / capital, while criticizing rent-seeking behavior. There's real value in a person choosing not to spend their money immediately, and instead giving it to someone else.
So back then we had high tax _rates_, high investment, and low profits. Now were have low tax rates, low investment, and high profits. The thing economists don't want to you get is the amount of taxes collected remained mostly constant. The difference is in the amount re-invested vs the amount extracted.
Technically, rent seeking comes up in situations where a private individual is capturing the value created through, eg, public infrastructure. The public can take this value for themselves through a land tax.
The profit made from maintaining a productive asset isn't considered 'rent'. So, for example, renting out a house is not necessarily rent seeking behavior (!!) because the landlord is maintaining the house. The rent-seeking part is when the rent is raised because a new local train station opens.
In this slightly technical instance, eliminating rent seeking, by definition, is likely to reduce the income to the those who are not adding any value. The behavior that is dis-incentivised was, again by deffinition, never economically productive. Economically productive investment (ie, capitalism) is supposedly untouched. Investors and retirees have to reallocate their investments into productive ventures instead of rent seeking, hopefully at no loss to their income.
The theory and practice might not be the same thing, I'm no economist.
This would collapse without rent-seeking as most old people suddenly would have to go back to work (except small minority of old people that made enough money in their lives but that will be less than 1%).
A more accurate and less ageist example is the struggling company that lobbies the government for government grants or special protections. This activity fails to create any benefit for society and in fact harms the public by redistributing resources from taxpayers to the company.
Productivity is a canard. Either labour is paid its living costs or not.
Care to elaborate? You don't think there are large variations in productive capacity among all of labour, and that higher productivity usually results in compensation far beyond living wages?
This may not apply to the majority of workers. I could see the Iron Law of Wages being true for them [1]. However, I don't think we should ignore the dynamics that we find as we move towards the edges of the spectrum.
[1] Still, I would argue that a "living wage" means different things at different times. A living wage at time period 1 could result in a significantly better quality of life than that from time period 2.
"A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation."
https://en.m.wikisource.org/wiki/The_Wealth_of_Nations/Book_...
The above statement is "totally wrong"? How can you be so sure?
As per the wikipedia description: "idea of rent-seeking was developed by Gordon Tullock in 1967.[2] The expression rent-seeking was coined in 1974 by Anne Krueger.[3] The word "rent" does not as a rule refer here to payment on a lease but stems instead from Adam Smith's division of incomes into profit, wage, and rent.[4] The origin of the term refers to gaining control of land or other natural resources." [emphasis mine]
Whether it is a pseudo "public" Government or a Private individual, the behavior of "rent-seeking" is the same, ie. resource's control.
So let's say a person is spending $2k a month on their basic necessities - housing, healthcare, insurance, transportation, and a little bit of entertainment. And now consider two people who spend the exact same amount. One earns $30k and the other earns $90k. The person earning $90k has $66k left at the end of the year after accounting for 12 months * 2k of spending. The person earning $30k has $6k left. The $90k earner is left to pay $9k in taxes. That's 9/66 = 13.6% of his disposable income. Pretty close to the nominal 10% rate. But the person earning $30k has to pay $3k. That's 50% of his disposable income! That 10% for all isn't exactly fair, in effect.
I think this disparity is a much easier way to consider tax brackets. And I think it's a politically easier sell to both sides of the aisle, than the more abstract notions of this article. Citizen A earns $x and citizen B earns $y. They both, on average, pay the exact same share of their disposable income in tax. I think it's pretty hard to argue against that, yet the tax brackets this implies would also help inherently tackle extreme levels of inequality.
What's more, is who gets to decide what is a necessity. Once upon a time I flew to Australia, bought a commercial van, a surf board, and converted it into a camper and travelled a loop around the country. I was by definition poor and homeless, but I was in heaven. I don't think this would qualify for any tax breaks under your plan. In this way your plan creates a complex tax code that does not align with me maximizing my utility function.
There are vast benefits to simplifying the tax code, and I would argue a better version of your idea is to guarantee a basic income to everyone.
BI won't work for everyone, such as the truly disabled, but it's a more efficient way of reducing inequality for the truly poor, and more capable of maximizing individual utility functions.
I know you will say "but who will produce useful goods and services," but at the moment I would wager far less than 30% of the population produces useful commerce. The labor participation rate is only about 60%, and many jobs don't produce anything useful. For example, police officers in Utah that settle for 0.5MM for unconstitutional injustices are draining taxpayer funds. Wall St is completely out-of-control. Bureaucracy, military-congressional-contractor-complex, healthcare insurance companies... There is an extroardinary amount of waste.
BI would also benefit the economy by increasing aggregate demand. It would stimulate investment by providing a safety net for indivisuals deciding to retrain or invest in education.
That would require that taking something from A and giving it to B would increase aggregate demand. I don't see how that can be.
> It would stimulate investment by providing a safety net for indivisuals deciding to retrain or invest in education.
This safety net may encourage people to drive around Australia in a van who would otherwise work, reducing investment.
It has been observed in historical data that the MPC for the poor is higher than for the rich--who are more likely to engage rent-seeking behaviors--which increases AD.
>This safety net may encourage people to drive around Australia in a van who would otherwise work, reducing investment.
Once in France I observed toll workers who take a euro from you to use the toilet were often of quite unhappy appearance. I heard "well its good because it gives them a job."
If you truly believe spending a year doing a mundane job that could easily be automated, or long-hours in MS Excel making "fat stacks" on Wall St, much of the lawyering, tax accounting, lobbying, etc, has more inherent virtue than surfing in Australia than we disagree on first-principles about human dignity.
What is the point of doing anything if it does not make people able to be happy, avoid suffering, and live into the future?
If your concern is that nobody will produce anything useful: I would really bet that more than 30% of the population would want to live on more than a basic income for their entire life.
A basic income which allows me to do something fun is quite the demotivator for doing anything more.
The problem is that improving yourself in order to raise you place in society usually sucks: endless learning, boring repetition, countless tired, lonely evenings.
Why would anyone go through all that when they can surf in Australia living in a van off basic income?!
I disagree that this is generally true (all of human history shows that humans generally want to continually gain both improved material position over time and more than those they see around them if there is an avenue to do so.)
Moreover, that's a rather distant theoretical complaint, anyway, because a basic income that provides anything more than the kind of marginal existence provided by American public welfare programs now (but with fewer disincentives to work) is probably far outside the ability of the economy to sustain without enormous technological progress.
FWIW we already spend nearly $10,000/person on transfer payments, welfare, housing, health, etc.
First, I believe that most people would rather relax and take it easy as long as their basic needs are covered (food, shelter, porn, games and some weed).
Secondly I think that we need SO much more work done around us, and of so much better quality. Everywhere I look I see crumbling cities, broken infrastructure, decaying building and wild nature reclaiming areas that used to be domesticated and manicured. The work being done is crappy, substandard and simply done badly. It's like nobody even thinks anymore.
Business are crying for better, smarter employees but they are unable to get them no matter the cost. Consumers are crying for better services and products but are facing a race to the bottom everywhere we look. Markets are failing everywhere due to the massive governmental interventions.
Maybe all this will be solved when robots appear, but for right now there is a lot of work to be done...
If this is true, it's because the existing system actually locks people in place rather than enabling improvement. Willingness to pay more once a state is achieved doesn't actually free people to achieve it. Doing what work one can for now to survive competes with investing time into self-improvement, which is literally a luxury many cannot afford.
I know, and have known, quite a lot of people who would be happy to do nothing productive and have someone else provide their needs.
In a way, it's a bit like college. How many people learn something by auditing a course? Not many - it's the pressure of exams and grades that provides the motivation for most students. All you have to do is look at their study habits - procrastinate until the last moment and then cram.
Differing marginal behavior between A and B.
To simplify and focus on simple consumption, spending that occurs on locally-produced goods during foreign travel has does nearly nothing to increase domestic aggregate demand in the travellers home country.
If we set the goal of defining tax brackets such that they affect any given person in any given bracket in a comparable way, it gives them meaning and inherent fairness. The measurement of real disposable income could be determined by aggregating costs across representative demographics. It's similar to the minimum wage. Right now so many things in our law are just magic numbers. Giving them actual meaning would likely not only make the law more fair, but also make it more transparent and difficult for special interests to lobby against.
I imagine we're headed inevitably towards a basic income thanks to automation. I just don't see any other way around it from either the consumer or the producer side. Companies need to earn money. Companies earn money from people who generally work to earn money in a very circular system. Take mass employment out of the picture and the whole system starts to break down. But I think that's beyond the scope of this post.
NOTE: my referencing Cruz and Paul should in no way be taken as any endorsement or approval of their tax plans on my part. I just used them because they are fairly typical for recent flat tax proposals.
For a lot of people the main selling point of a flat tax is its supposed simplicity. They have fantasies of spending two minutes a year doing their taxes. I say "supposed simplicity" because many of these proposals still include numerous deductions and exclusions, and THAT is where 99.99% of the complexity of the tax system resides.
Once you have figured out your taxable income the actual computation of the tax is close to trivial under both the current system and the two bracket "flat" tax systems. All that changing from the former to the later does is shorten the Internal Revenue Code by about 5 lines.
If a flat tax proposal does actually eliminate all the deductions and exclusions, so that your taxable income really is trivial to compute, then it would greatly simplify doing your taxes--but that has nothing whatsoever to do with it being flat. Such a simplification works just as well for a tax with several progressive brackets.
Exactly, no matter how many tax brackets you have, without the miscellaneous deductions, calculating your total amount of tax to pay involves simply looking at a table of income ranges for a set of three numbers that applies to you and then doing the calculation top_marginal_tax_rate*(income - top_tax_bracket_lower_bound)+tax_on_income_in_lower_brackets. So the entire work to calculate your tax burden is one table lookup, one addition, one subtraction and one multiplication.
The flat tax proposals simplify that by getting rid of the addition (by making tax_on_income_in_lower_brackets zero) and making the table lookup only contain two rows instead of many. So you have removed one arithmetic operation(or three if you are under the 0% bracket cutoff), and cut down on the number of rows you have to scan through by a single digit number. That is completely negligible to dozens of pages of reading you would have to do if you have even relatively simple deductions.
The reason prices are able to stay relatively low is because players able to get by with very little profit made up for by enormous quantity. Tax on gross and suddenly you send the profit requirements at every link in that chain way up, and that's going to be reflected (strongly) in the price of the final products.
Even take Amazon as an example as just one link in the chain - the retail. Their total revenue is $136 billion, but their net income is less than $3 billion. Even if they're playing fast and loose with operating expenses, their margins are not huge. Change to gross taxation and they'd have to be. Just to get into the black, you'd see prices raise dramatically from them. And of course the same would be true of all of their suppliers, producers, and so on - which means they'd be increasing not only to compensate for their own increase in costs, but for all the increases that go all the way up the development chain of every product you buy. It wouldn't be pretty.
And corporations, unlike individuals, have another option. They can simply move. Citizens can't do this. Even if they move, they're unbelievably required to continue paying US tax - we're the only nation in the world that requires this of nonresidents. This idea would be devastating to the US.
>"How Much Inequality Is Fair? Mathematical Principles of a Moral, Optimal, and Stable Capitalist Society, [...] perfect inequality, which has a definite mathematical form."
Income inequality does not have a "perfect mathematical form."
Since the stoics, clever folks adept with maths have realized that 'math/stats is the best way to lie or convince people you are right.'
Why? Because people trust in the intellectual rigor of maths. But while the language of maths is fundamental to our universe, formulating an argument with maths does not necessitate correctneas. even the hugely-influential economist Keynes, and others, believed that 'human behavior cannot be reduced to mathematics.'
Economics is currently, and has been for a century, trying to formulate as much as possible in the language of math, but we're consistently in disagreement and wrong. That is because Economists are almost always without the virtue of being able to do controlled experiments.
If you wanted to know the 'definite mathematically ideal' amount of inequality, you would first need to put forward a hypothesis which also defines ideal. "X is ideal for maximizing aggregate utility" is a reasonable hypothesis. Then for your experiment you would need many planet earths, and some way to to precisely measure people's utility.
This is all impossible. And as such, we would be wise to treat the current state of economics like that of 19th century medicine: somewhere between interesting-possibly-helpful and hogwash.
That said it should be noted that there are parts of Economics that do work really well when applied (e.g. certain market mechanisms where profit-maximizing rational agents are a reasonable assumption.)
My biggest concern with Economics is that there is too much money in Economics. Unlike something like Physics or Chemistry, there are too many stakeholders with significant financial resources that have an interest in having the mainstream thought lean one way or another and the big Economic systems are too complex for "wrong" theories to be definitively "debunked". I'm not insinuating any academic misconduct, but what is considered successful/fruitful/popularized research is surely affected by money, in terms of funding departments, funding research, or well-financed employment at various institutions. Think taxes, financial regulation, discretionary monetary/fiscal policy, and so on. You will probably find that the "boring" parts of Economics like education, food and transport to be relatively level-headed. My advice for anyone interested in any Economic theory is to ask of any claim 1) Who are the stakeholders, who stands to gain? 2) How easily is the claim falsifiable?
And of course always remember the Gell-Mann Amnesia effect.
Yea, I think that is good advice.
I would just say those fields you listed are good, but maybe not best examples: something like Management Science/Applied Maths has a lot of useful, yet very boring, techniques for business, such as linear optimization. Education, food and even transport also has politics.
The economic "science" circling around the Fed is one day going to be seen as more egregious offense than the Nobel Prize given for the lobotomy procedure.
Only the latter; you don't need a whole planet to study, and statistical control is real control.
OTOH, the missing bit is utterly intractable, so...
Regardless, the classic part is highly intractable already.
I'm not arguing that our current situation is ideal, or that we can't do a lot more to provide greater opportunity for all and raise the floor for everyone.
But complete "equality of outcome" seems to go against all of my understanding of the dynamics through which the universe actually unfolds over time. I can only imagine it as a very unstable state that is held in place through immense effort and force.
Poorly-regulated capitalism doesn't provide that. Capital begets capital as capitalists become more able to invest in high-risk high-reward projects, leading to a positive feedback loop that is an anti-equalizing force.
The problem is, the unemployed person doesn't care whether or not the NAIRU as a model is fair. They already have their one shot at life, going on right now.
So, I think we shouldn't care what the curve is, and focus on the extremes on both sides, because both are bad. Poor people have it bad for obvious reasons, and that should be enough moral justification to not have them at all. Too wealthy people are bad because money translates to power, and this power can be misused.
But I agree with the author that we should have progressive taxes, but also basic income (and I think Norway is close on both).
Even people who use cars, trucks, ships, block and tackle, nail guns, etc., make more than those who do everything with their hands.
If we want to reduce income inequality, we have to educate people to understand and take advantage of technology. It is the key to prosperity.
And, since there will always be people who don't multiply their efforts with technology, income inequality will only keep increasing. But quality of life for even those at the bottom will keep on improving.
And the counter point to increasing productivity is that in times where companies were no where remotely close to market saturation increasing productivity meant better wages, better jobs, and overall growth for everybody. As companies' product reach market saturation increases in productivity translate to layoffs and stagnant wages. It's this constant race between the growth in the number of products to be produced versus our increase in efficiency at producing the products that already exist. The latter seems to be accelerating much faster than the former, and that's not a good thing.
To be clear on the above imagine we have n total products being produced. And as wealth and entrepreneurship expand we see a regular increase of about 10% new products being demanded per unit time. Yet our efficiency at increasing products increases at 15% per unit time. That's going to lead to a squeeze on those that rely on production for their livelihood that can only be ended by deceleration in productivity or acceleration in demand for new products. It's debatable whether or not we're in this situation today - but it certainly does explain many otherwise bizarre economic factors quite handily.
Paychecks are not the whole picture and much of what you can buy with the same money adjusted for inflation today is vastly improved. Even ten year old cars are much more reliable than when I first started driving. And that is not in your paycheck.
Some jobs are negatives affected by increasing productivity. When a nurse can handle twice the patients through technology, the care would get worse as the amount of human interaction is the quality measure here. Same with teachers.
Although there could be improvements that reduce the time spent on other things than interaction, thus leaving more time for that.
If you want a stable society you will work towards ensuring people have decent income, possibilities to grow and overall wider distribution of income. The alternative is oppression when people react to their conditions.
There is no point having a few people capturing the wealth of and productivity of a society. Yet you are already born into a society with rent seekers and individuals who hold a huge amount of wealth. The top 1% already control the economy and assets.
Discussion about inequality then is moot as it only perpetuates an illusion of control and freedom to decide the issue when there is none.
I am not sure of the exact word but it's like a transaction with a used car salesman. The transaction can never happen at an "ideal" price. Car Salesman will always overvalue the utility while the buyer will always undervalue the utility.