In light of the State of the Union Address by President Obama, I am compelled once again (as if I were a “broken record”) to address the President’s proposals to raise taxes on “the rich” in order to reduce inequality and provide new services to those with lower incomes.  Perhaps there are some new readers on this blog who haven’t seen my previous posts on the same subject, so this effort may not be wasted.

The issue of inequality of income as well as other resources has been ongoing for a very long time.  The first period on history I recall reading about it was the late eighteenth century and early nineteenth century, among the very early socialists of France.  But it has intensified in the last one hundred years and now has been a frequent recurring theme among Democrats in the United States.  It has already been “institutionalized” in Europe as a given that must be somehow eliminated.  Thomas Piketty’s recent book, Capital in the Twenty-First Century, has given some added academic credibility to those decrying the inequality problem.

President Obama’s proposals, though not likely to pass Congress, do put the theme in the minds of many potential 2016 voters.  As someone once wrote, there are two ideas which together ensure that the idea of inequality can become potent at any point: the right to vote and the problem of envy.  That is why every time it is raised the inequality issue must be addressed.

What did President Obama propose?  He proposed several increased taxes that would fall on those having the most income or capital.  The purpose was two-fold:  (1) obtain more revenue to spend on more government and (2) simply to “level the field,” to create less distance between the wealthy (as he defines them) and the less well-off.  A few of the proposed taxes would actually harm the less well-off disproportionately, but that didn’t seem to deter him.  Now let’s talk about this inequality issue more.  I will focus first on the income inequality debate and finish with the capital taxation problem.

Again, I apologize to those who have read about this before—I have written on it a couple of times myself.  Inequality of income (leaving aside capital for now) is a situation in which there is a substantial gap in annual income between those at the very top or highest incomes and those at the bottom.  “Substantial” is not defined, but we can assume it is on the order of multiple millions or higher versus much less than say $60,000.  Perhaps we could translate this to say that the highest incomes are something like 100 times greater than the lowest.  That supposed fact is really no fact at all.  It is a logical fallacy because it defines nothing.  It is the fallacy of “statistical nonsense” as far as I can tell, one which asserts its importance but literally in the context in which it is used, is meaningless.

This is what I mean.  The concept of inequality is considered bad in itself, but those who criticize it do not define the actual well-being they would want to see at the “bottom” of the income range or what the average incomes are in that range or even how well-off those individuals are apart from income—in terms of goods that improve quality of life.  So we might agree that inequality is bad if average income among the bottom 10% was say $10,000 in America (that would be a high figure in Africa), while average income among the top 10% was $1 billion.  There is inequality and the lowest incomes are arguably too low for much of a quality of life at all.  But even here, we have to be careful not to jump to the conclusion that those at the top got there by exploiting those at the bottom.  Making that causal connection leads to very bad policy prescriptions.

We also must be careful to compare the actual situation of those at the bottom with the alternative.  If they are poor, would they be poorer if income equalization tax and welfare policies were in place, if a socialist or corporatist system were in place?

Finally, it is crucial to determine the actual well-being of those at the bottom in a given nation.  If the top earners make 100 times the income of those at the bottom, but those at the bottom make $100,000 on average, then it seems rather silly to call for equalization policies that will only make those at the bottom worse off.  Unfortunately, this is the kind of policy President Obama appears to favor, even though Americans on average are quite well off in terms of both income and other measures of well-being.  There are of course genuinely poor people, and government aid in various ways can and may help them—though it should not be designed to make people dependent.  Moreover the church and Christians do have an obligation to the truly poor.  That isn’t the issue here however.  This issue is about using inequality as a measure by itself of determining individual well-being.

In fact if governmental policy did engage in the kind of equalizing efforts of the old Soviet Union or other like nations, as some would favor, we would end up just like them—everyone worse off and the bottom earners even “more” worse off.  The only well off people would be politicians and government bureaucrats who redistribute part of the pie to themselves before any of it gets divvied up to anyone else.

Now President Obama’s tax proposals consisted not of income taxes but of inheritance and capital gains tax increases.  But even these present important problems that will not help even assuming one’s goal is equalizing income or other resources.  Moreover they would affect income at some point, and that impact would likely harm the bottom income earners.  As Richard Epstein has written,

Yet the increase in the capital gains tax creates a double whammy. The first point is that the reduction in capital investment that this tax promises will make it more difficult for wages to rise. The simple proposition here is that capital and labor are complementary goods, so that higher wages depend on the better facilities and equipment that makes labor more productive. The second point is that the increase in capital gains rates is likely to translate into a reduction of taxable income. Unlike income from earnings, the capital gains tax is only triggered by a sale or other disposition of property. The high tax results in a reduction of the number of sales. That in turn not only decreases tax revenues, but also the efficiency of the capital markets, because it is more costly for people to switch their investments from inefficient to efficient firms. (“The Sad State of the Union,” in Defining Ideas, January 26, 2015)

I cannot determine whether the president is ignorant of economics or that he is simply doesn’t care what the consequences would be.  But I do assume Congress will not fall for the populist rhetoric.  At least that is my hope.

So when someone begins to say that income distribution is unfair or that capital gains are somehow a bad thing, and traces that to inequality of income, ask them how much they think those at the top should be taxed and how much those at the bottom should be given from that tax revenue.  Then ask them what that does to the incentives to be innovative and productive.  Ask them how they would arrange thinks to create opportunities for all to flourish.