How Much Should We Redistribute? And How?

In an earlier post I argued that “luck’s influence means that redistribution is a justifiable remedy.” John Nye says he disagrees. This is a fairly straightforward difference in philosophical views, and I doubt further discussion of it would persuade anyone to change sides.

But suppose one does think luck’s impact justifies some redistribution. John still objects, because “we do not and almost never have enough evidence (certainly not at the national level) to make judgments about whether luck was the primary cause of a given inequality.” That’s true. Policy makers would need to know intricate details of each person’s life history. They can’t. Nor would we want them to. And even with this information there would be uncertainty about how much influence luck has had in any particular case.

So what should we, as a society, do? John seems to think the best course is to forego redistribution in order to avoid mistakenly rewarding someone who isn’t faring well but is in that condition mainly due to laziness, a short time horizon, or a preference for leisure, and to avoid mistakenly penalizing someone whose income is large because of prudence, hard work, or risk-taking. He offers a few hypothetical cases to illustrate. Undoubtedly such cases exist. But as best I can tell, he isn’t suggesting they are the norm. With any government action there are mistakes, but that in and of itself doesn’t strike me as a compelling reason to favor nonaction. Moreover, in my view these types of characteristics, preferences, and behaviors are, to an extent not often appreciated, themselves heavily influenced by luck.

As a practical matter, we, like all other affluent countries and most not-so-rich countries, have moved beyond the question of whether or not to redistribute. We do redistribute. The interesting questions have to do with how much to redistribute and how to do it.

The average inflation-adjusted pretax income of the top 1% of American households jumped from about $500,000 in 1979 to about $1,700,000 in 2006. For households in this group, the effective tax rate (taxes paid as a share of pretax income) for federal taxes in 2006 was about 31%. That was down from 37% in 1979 and 34% in the mid-to-late 1990s.[1] I favor pushing that effective tax rate up to around 35% (there are various ways to do this) and using some or all of the additional tax revenue to increase the Earned Income Tax Credit.

Would this improve the material well-being of Americans at the low end of the income distribution? Enhance their freedom and dignity? Would it boost employment? Stifle innovation? Impede economic growth? Reduce opposition to immigration? Increase social cohesion? These are, to my mind, the kinds of questions that ought to be at the forefront of debates about inequality and redistribution.

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[1] These income and tax rate data are from the CBO. The federal taxes included in the CBO’s calculation of the effective tax rate are individual and corporate income taxes, the Social Security and Medicare payroll tax, and excise taxes.

Also from This Issue

Lead Essay

  • Economic Inequality and the Mirage of Injustice by Will Wilkinson

    In his lead essay, Will Wilkinson observes what he believes is a poor chain of reasoning: Income inequality is rising; it is also a measure of injustice. To fix this injustice, we should redistribute incomes. Wilkinson attacks this reasoning on several fronts: Income inequality is less important than consumption inequality, and consumption inequality is probably lessening. But if income inequality is a problem, it is so only as a symptom of a different problem: substandard schools, perhaps, or our high incarceration rate, or CEOs who conspire to overpay one another. Rather than redistributing income, we should identify the underlying problem and fix it directly. This may well lessen income inequality, and it will also fix an undoubtedly serious problem somewhere else in our society.

Response Essays

  • Is Consumption the Grail for Inequality Skeptics? by Lane Kenworthy

    Lane Kenworthy argues that income inequality is indeed important, and that we should not be misled by the relatively reassuring data on consumption. Unconsumed income also adds to the quality of life enjoyed by the rich, even if that increase is still hard to measure. A more egalitarian society need not entail a radical social leveling, but it should entail better public services for the poor and the middle class.

  • Why Things Will Feel Worse As They Get Better: The Downside of Growing Consumption Equality by John V. C. Nye

    John Nye adds several considerations to the mix: First, positional goods may make us feel more unequal – there are only so many “top ten” schools for our kids, only so many “best” views or neighborhoods. Yet, with rising incomes, more of us feel that we should be able to afford them, even as they slip further from our grasp. As we become more equal, we feel less equal. Second, one other effect of relative equality has been to erode the security formerly enjoyed at the very top of the economic pyramid. This security itself was a form of compensation, and executive salaries may be rising in recent years in part because executive security has fallen. And third, much of human inequality is not directly measurable in money at all. Differences in appearance, intelligence, ability, and the like are all real and may translate into economic inequality as well. Consideration of these elements is curiously absent from many discussions on inequality.

  • What Should Egalitarians Want? by Elizabeth Anderson

    Elizabeth Anderson agrees with Wilkinson that the root causes of inequality are more troubling than inequality taken alone. But economic inequality is still a problem for two reasons: First, economic inequality of the sort we have today is not making the poor better off in absolute terms, but rather it is making them worse off. And second, economic inequality translates directly into inequality of political power, which in turn reinforces economic inequality. This is an unacceptable state of affairs.

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