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. 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.
 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.