Income Inequality?

When did income inequality become a bad thing? It is actually a huge virtue of capitalism. It is not a problem no matter how large it gets, and the government needs to stop trying to balance things out through “wealth redistribution”. If you want income equality you want communism plain and simple. The reason that capitalism creates so much more wealth than communism is because it incentivizes wealth creation. As a result a much bigger pie of wealth is created and available to those who would like to go out and work for it. This tends to drag up the quality of life for everyone, except the ultra-lazy. Ultimately the income inequality “problem” is the result of government meddling, and it will not be fixed through additional government meddling.

Let’s take the highest paid CEOs as an example. Let’s say they are making $25 million a year while the lowest level employees are making $25k per year (1000x). In a pure capitalist economy, this does not really make much sense unless the CEO is bringing 1000x the value to a company as the lowest level workers. While, I would like to believe this could be true, I simply don’t believe that it is. So, there must be something not pure capitalist about our economy that allows for some individuals to be paid much more than they are actually worth. I am going to point to government regulation of the economy as the cause of these inflated CEO salaries. In a pure capitalist economy, there should be ample competition. If a company is making enough money to pay their CEO $25 million/year, surely there is a smaller company out there who pays their CEO less that $1 million per year that has a much lower cost structure. Normally you would expect these smaller, more nimble companies to attack the big and bloated $25 million CEO companies across many fronts with much success. They can undercut on price with a lower cost structure. They can be closer to the customer than a giant corporation can be. For some reason this is not happening now. What has happened is that large companies send large armies of lobbyists to Washington, who have a large influence on the industry regulations that are written. The complex regulations end up favoring the big established companies by creating huge barriers to entry via endless red tape that small businesses can’t afford to deal with. As a result consumers don’t get real competition, and end up subsidizing a fat CEO paycheck through higher prices. Rather than just jack up the tax rates on the CEO you just need to lower the barriers to entry by eliminating the overregulation of businesses.

Jacking up the income tax rates on the rich has never worked anyway. A change in the tax rates does not equate to a change in tax collections. This is a fact that is completely ignored by the CBO and those in power today. The “cost” to extend the Bush tax cuts is widely reported at $4 trillion over 10 years, with $700 billion over 10 for the top tax rate alone. Where does that number come from? It does not come from reality that is for sure. Reality would look at income tax collections before and after the Bush tax cuts were implemented to see what the “costs” actually were. The Bush tax cuts were implemented in 2001 and 2003. In the latter part of the decade through 2008 income tax collections were up substantially over what was collected before the tax cuts were implemented. While there was a brief reduction in collections, immediately after the cuts, the economy recovered to the point where record income tax collections were possible and happening once again. The ten year “cost” of the Bush tax cuts when they were first implemented will be less than zero after 10 years have expired. Claiming that extending them out another 10 years would cost $4 trillion is an estimate that is wrong by more that $4 trillion. It is a complete joke that completely ignores what actually happened. Raising taxes does not equate to higher tax collections. Income tax collections have held steady at around 19% of GDP over the last 60 years regardless of tax policy. Letting the Bush tax cuts expire would likely damage the economy so much that income tax receipts would fall. Not extending them would have a cost, while extending them is free.

Income inequality is what makes America great. It is the incentive for anyone including the poorest of the poor to work hard and earn a better quality of life. If you take it away, you remove all incentive to work hard. The classic example is a real example from an economics class where the students were pushing the idea that socialism was a more just economic system. The professor said that if the whole class agreed to it, he would use a socialized grading system. He would average the student’s grades and give everyone in class the same grade. The students agreed, and for the first exam the best students worked hard, and the worst students did not study, and the class got an average C+ on the test. This discouraged the top students who tried less hard for the next test, and encouraged the worse students to not try at all. The next exam the class got a D+, and by the end of the semester the entire class got an F. The real economy is no different. If you incentivize laziness, and de-incentivize hard work, everyone loses. Income inequality is the incentive system that keeps America strong.