Monday, April 21, 2014

Income inequality and wealth redistribution. Doesn't everybody lose in the long run?

There's a lot of talk about what to do about income disparities as the percent of income in society is moving towards the wealthy.  The easy, almost knee jerk reaction of some is redistribution of wealth through raising taxes on the wealthy, raising minimum wage and so forth. 

But simply taking money from higher income people and giving it to another through a government welfare program often benefits no one in the long run.  Welfare, except for the truly needy, discourages work and initiative and encourages dependency.  The wealthy person taxed has less incentive to work hard and invest and create jobs, so there are fewer jobs for lower income folks.

Here's a discussion of this by columnist Robert Samuelson.  He references a French economist Thomas Piketty who dislikes income inequity so he wants to redistribute money.
He objects to extreme economic inequality because it offends democracy: Too much power is conferred on too few. His economic analysis sometimes seems skewed to fit his political agenda.
Take his tax increases. He doubts that they would hurt economic growth. This seems questionable. Incentives must matter, at least slightly. Or consider his predicted slowdown in the world economy.

This seems possible, but if it happens, capital owners would likely suffer lower returns. As for the power of the superrich, they hardly control most democracies. In the United States, where about 70 percent of federal spending goes to the poor and middle class, the richest 1 percent pay nearly a quarter of federal taxes. After-tax and post-government-transfer incomes are less unequal than Piketty's pretax figures.

Still, the present concentration of income and wealth instinctively feels excessive. It understandably stirs resentment. We'd be better off if the rich were less so and other Americans were more so. But it's doubtful that political action to force this transformation would be similarly beneficial. Class warfare is bruising; today, it would degrade the confidence needed for a stronger recovery. 

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