Fixing Income Equality is Easy (Unless You Actually Want to Fix It)
It's simple: We just have to define the problem and then solve it.
Tim Harford ostensibly proposes “Four steps to fixing inequality,” but actually offers five or six musings about the topic. Ultimately, they all boil down to the notion that the way we structure our public policy largely determines the distribution of wealth.
The first step is to be precise. Are we using the Gini coefficient or the share of the top 1 per cent to measure inequality? Wealth, consumption or income? Before taxes and benefits or after?
This last question is often ignored but it makes a big difference. Consider Finland, France and Japan. Looking at pre-tax household incomes, Finland is the most unequal of the lot. But after the tax system has done its work, Finland is the least unequal. (My source here is a database compiled by the political scientist Frederick Solt.)
Finland’s market economy delivers outcomes roughly as unequal as those of the UK and the US but the tax system is far more redistributive. In contrast, Japan is more equal than the UK and US despite a tax system that redistributes less than theirs, because the country’s economy delivers more egalitarian outcomes.
This isn’t a “step” at all, merely a recognition that there are multiple ways to measure “inequality” followed by the blinding flash of the obvious that redistribution redistributes. But, yes, not letting those who earn more keep as much of their income makes them less unequal–especially if we take that money and distribute it to those who earn less. But note that Harford doesn’t propose an actual policy; he merely notes that tax policy is a tool for leveling.
The second step is to look at underlying causes rather than symptoms. As the philosopher Robert Nozick forcefully observed, there is something strange in worrying about income distribution without considering what processes, just or unjust, produced that distribution.
This isn’t just a philosophical argument – there are practical implications. Consider JK Rowling who is extremely rich because every time someone buys a Harry Potter book, she gets a cut – and a very large number of people have bought Harry Potter books. Unless Bill Gates is out shopping, every time a Potter book is purchased income inequality increases.
Rowling’s wealth is underpinned not only by Harry Potter’s commercial success but by copyright laws which ensure she reaps the benefits of that success. Rowling is not yet 50, so with luck she will still be with us in 2050, and her books will continue to generate inequality-increasing copyright revenue for the rights holders until 2120. A different set of rules might have produced a result that was more equitable yet perfectly efficient. Rowling did not need several hundred million pounds to persuade her to tell us what happens to Hermione in the end.
My point is not to single out Rowling for any criticism but to point out that fortunes do not accumulate through skill and luck alone – there is always a particular underpinning of laws and regulations that could, if we wish, be changed. Carlos Slim’s América Móvil and Gates’s Microsoft could have been broken up by antitrust authorities.
Chief executives enjoy inexplicably large – and often opaque – remuneration packages. Oversight could be tightened, shareholders given teeth.
When we look directly at the sources of high incomes we will sometimes discover policies that would be a good idea in their own right and might reduce inequality only as a side effect.
This, too, is neither a “step” nor an actual policy proposal. But he’s right that granting intellectual property rights—and monopoly rights at that—to those who create intellectual work can allow those granted such rights to get fantastically wealthy. Or that, if companies are allowed to pay their employees a lot of money, some will do so and said employees will make a lot of money. But these are just more blinding flashes of the obvious.
Do I think it makes sense for Rowling’s heirs to have monopoly rights on the Harry Potter franchise for the next century? No. But nor do I begrudge Rowling’s getting filthy, stinking rich for creating the most significant literary franchise of the last half century or so. Nor do I think it’s time for Rowling to have to compete with others who would like to write Harry Potter books, make Harry Potter movies, or sell Harry Potter merchandise. I don’t have a strong opinion on when those rights should transfer to the public domain; 25 years after the rightsholder has quit producing new works seems about right to me, but that’s just spitballing.
The third step is to reform redistribution. As the example of Finland makes clear, it is possible for a rich and successful nation to change its income distribution dramatically through the tax system. (A recent and celebrated research paper from the International Monetary Fund adds some more careful empirical backing to this intuitive idea – although there are too many imponderables in such an analysis for it to clinch any argument.)
Not only must we ask how much to redistribute – largely a political question – we must also ask how to do it. Tax codes are riddled with loopholes and special cases, and under the pressure of the deep recession, such tangles appear to be proliferating. The British system has two nationally levied income taxes and in recent years has introduced a new (and gyrating) tax band for high earners; a separate band over which allowances are withdrawn arbitrarily; and a third band over which child benefit payments are withdrawn. Further crenellations are promised if the Labour party is elected.
However much redistribution we might feel is just, it’s certainly clear that we could redistribute for less trouble if our politicians paid more attention to sensible tax design and less attention to crowd-pleasers.
This “step” seems an awful lot like the first one. (For that matter, the second is just another way to redistribute.)
Step four is to remember the small stuff. Inequality is a consequence of countless policy choices too trivial to trouble finance ministers: whether there are good teachers in most classrooms; whether poorer areas of town are safe at night and have access to affordable public transport; whether toddlers are receiving stimulating childcare; whether the pension system encourages savers without making millionaires out of slick middlemen. We should gather better evidence on such questions and act on that evidence.
Well, yes. This is the only “step” thus far that’s a step. Actually, it’s several steps. But he’s outsourcing coming up with said steps to unspecified others.
A final, fifth piece of counsel: don’t for a moment think this is a problem that can be solved in four easy steps.
Well, apparently, it can: Redistribute income in some fashion and have someone else figure out how to do it. That’s just two easy steps!