The Muddled Issue of Income Inequality

Thoughts on a misunderstood question

What's Going On? | Matt Boomer | February 9, 2016

  • Copied

If you’re like me, you enjoy checking in on our friends at the ND-SMC Observer for “Viewpoint wars,” acrimonious exchanges between students on differing sides of an issue. These skirmishes often leave the reader with one conclusion: everyone involved is wrong.

One example is the recent fracas in which an article called into question the significance of income inequality and was greeted with numerous rebukes.  The initial offering – that income inequality does not present a serious issue – was wrong. However, when reading the responses I noticed a problem. Nearly every one contained a sentence along the lines of, “Income inequality can impact growth,” “Increasing income inequality is what is currently contributing to growing immobility,” etc.

This analysis is deeply flawed, presupposing as it does that inequality is a cause of events rather than an effect, an active force rather than a descriptive metric. The above assessments are backward. The correlation between growth and inequality should not be, “Inequality slows economic growth,” but rather, “Slow growth contributes to inequality.” Likewise, immobility, brought about by poor educational systems and barriers to personal advancement, drives income inequality, not the other way around.

This misunderstanding is popular because it suggests a simple solution: increase taxes on the wealthy and give the revenue to others, ensuring just distribution of wealth. One viewpoint writer summed this up nicely: “Do (businessmen and innovators) deserve to earn as much as they have been recently earning? Absolutely not.” Those businessmens’ customers evidently disagree. Nevertheless, immobility for the poor and working class is very real.

However, inequality properly understood – as a statistic indicative of deeper problems, resulting not from inordinately high incomes at the top of the ladder but stagnation at the bottom, arising from a confluence of factors including anemic growth, globalization, and inadequate educational institutions – suggests solutions that have little to do with raising personal income tax rates. I am generally skeptical of “trickle-down” tax cuts, mostly because when the government is $18 trillion in debt and running deficits, a tax cut offers a short-term benefit while worsening a long-term problem (foreshadowing: one exception is the corporate tax, which is a double tax). However, there are other solutions that similarly avoid imposing costs on businesses and investors.

A major driver of inequality is globalization, which is decried by Trumpite and Sanderista populists alike. Economic gains from trade need not be explained in the 21st century (most of the time), but there will always be jobs lost to countries with comparative advantage in some industries. Cutting back red tape could ameliorate this problem and help people move into new careers. Take occupational licensing, which has spread to about a quarter of the working population and covers five times as many professions as it did in the 1950s, with licenses often requiring skills unrelated to the jobs they sanction. This benefits entrenched interests by minimizing competition and stifling entrepreneurship, directly contributing to inequality. Arguments for licensing’s necessity are hamstrung by its extension to such fields as hair braiding and floristry.

Clearly requires the steady hand of a licensed professional.
Requires the steady hand of a licensed professional.

 

 

 

 

 

 

 

In a similar vein, over-restrictive patent laws, which go so far as to protect “methods of doing business,” and retroactively extend patents to previously-created works, prevent the entrance of new players into product markets.

Younger demographics would benefit from reforming America’s broken education system, which disadvantages children in the wrong zip codes and erroneously holds up the four-year degree as the only path to success. The proliferation of educational options for the poor through school choice and vouchers is vociferously stalled by teachers’ unions, whose craven clientelism places the economic interests of teachers above students’ wellbeing. Meanwhile, our obsession with the four-year degree and the irrational stigma attached to vocational training result in a dearth of qualified applicants for jobs in numerous fields, particularly the industrial arts. A welder or mechanic can earn a middle-class income with prospects for upward mobility almost immediately out of trade school, without the crushing burden of student loan debt. These avenues provide opportunities for lower-income Americans and do not deserve the stigma our culture has assigned to them.

At the macroeconomic level, a valuable adjustment would be no longer having the developed world’s highest corporate tax rate.  I can already hear protests that effective rates are lower than the on-paper rate, but this does not make things better. Effective rates vary from one corporation to another according to loopholes in the tax code, encouraging businesses to spend substantial sums on tax lawyers and lobbying that could go to developing products or expanding into new markets. Compounding this problem is our insistence on being one of the few countries in the world to use a non-territorial tax system – taxing corporations not only for profits from U.S. operations, but activities around the world. It should not be surprising, then, when a company like Pfizer tries to move to Ireland and its friendlier tax climate. Tax reform would make it easier to keep businesses and jobs in the United States, prompt the return of wealthy Americans‘ earnings to our shores, and attract foreign direct investment, thus reducing inequality and increasing economic opportunities.

Alas, the story of tax, regulatory, and education reform is boring, and not as moving as one of corporate knaves and robber barons, and thus unlikely to play out.