Shaping Market Forces
Matthew Yglesias argues that the government can alter market forces with tax and regulatory policy.
The clearest example is that if we imposed a 100% tax rate on incomes over $400,000 no one would get paid over $400,000. Offering a $500,000 salary would cost the company $100,000 more than a $500,000 one, but would do nothing whatsoever to help you attract a better employee than would a $400,000 salary since the take-home pay is the same. Similarly, a 90% tax rate on incomes over $400,000 would be a strong disincentive against paying anyone more than $400,000. It’s basically the Laffer Curve insight in reverse — high levels of taxation on the top range of income is probably not going to generate much revenue, rather it will ensure that very few people obtain super-high wages.
Now in the real world, lots of people get non-salary compensation, so designing a pro-equality tax code would be more complicated than simply boosting the regular income tax way up, but the basic point still holds — “the market” does not make inequality inevitable, we can use the tax code to alter market conditions in pretty much any way we desire. Doing this in a ham-handed way, of course, would have various bad effects, so I would prefer to see only modest steps taken in this direction (and, at the same time, toward boosting wages at the bottom end through minimum wage laws) which can be followed by further modest steps if things are working out okay. Since, realistically, only modest steps — much more modest than what’s outlined in my example — are politically possible, this is all for the best.
I take it as a given that government intervention skews the market but I’m not sure the basic trends would alter. The inequalities that make some people “worth” $500,000 to the firm and others “worth” only the minimum wage would remain exactly static. If we increased the tax and regulatory pressures against high incomes, it strikes me as unlikely that the money would instead go to hire a bunch of folks at minimum wage. Or redistributed among lower wage earners since, shoot, there’s an extra $100,000 to spend. Someone would pocket the difference or, given that hiring the $500,000 employee would still be advantageous, the firm would figure some way to hire him through untaxed incentives.
Even to the extent of creating a black market, if necessary. We have all manner of regulatory incentives to prevent people from making over $0 selling heroin, for example.