I ran across an interesting observation in Fault Lines by Raghuram Rajan (a U of Chicago economist who has the distinction of being on of the economists who clearly and unequivocally warned of and predicted the recession well in advance of its occurance). Anyhow, I thought this quote fragment was insightful when viewing the distinct difference between left and right regarding income inequality, from the beginning of Chapter Nine:

Not all forms of income inequality are economically harmful. Higher wages serve to reward the very talented and the hardworking, identify the jobs in the economy that need the most skills, and signal to the young the benefits of investing in their own human capital. A forced equalization of wages that disregards the marginal contributions of different workers will deaden incentives and lead to a misallocation of resources and effort. 

However, when the only pathways to high wages are seen to be birth, influence, luck, or cheating, wage differentials may not act as a spur to effort. Why bother when effort is not the route to rewards? Ineed, as the political economists Alberto Alesina and George-Marios Angeletos argue, perception in a democracy as to how high wages or wealth are obtained can create self-reinforcing patterns. If society believes people earn high wages as a result of their training and hard work, it is less willing to tax high earners, thereby ensuring they have strong incentives to acquire skills and exert effort. If society believes people earn high wages because of connectedness, chance, or crookedness, then it will tax incomes more heavily, and since few of the honest will then bother to work hard, only those with influence, the lucky, or the cheats will flourish. 

The left and right in the US are distinguished in part by their willingness (or lack thereof) to tax high earners. The left like to pretend that the middle class right is “duped” into wanting to lower taxes on the wealthy because they are just stupid when in reality what is going on is that the middle class believes that the wealthy got that way in the main part due to their training and hard work. One might also observe that the left’s willingness to punish the wealthy will have its own negative social repercussions as noted above as well. 

Mr Rajan also points out that the willingness to tax high earners is higher than it was in the past and the above observation might be a clue to why that might be, that is our perception of who the wealthy consist as well as how they got that way is moving. This is unfortunate. 


Filed under: Economics & TaxesGovernmentMark O.

Like this post? Subscribe to my RSS feed and get loads more!