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Income Inequality and Legal Plunder

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chartFueled, in part, by the Pope’s passionate appeals, the campaign to reduce income inequality is growing rapidly around the globe.

The income equality movement argues that there is a growing gap between the incomes of top earners and everyone else. This claim is supported by a recent study conducted by the International Monetary Fund. In the United States, the income growth rate for the highest income earners has significantly surpassed the national average over the past 30 years.

Many politicians, including President Obama, have called for policy changes in order to slow the growing divide. However, this concern results from a distorted understanding of the word “income” and disregards the importance of aggregate income growth.

The term “income inequality” is deceptive. It is used to imply that income equality is the norm and anything else is abnormal and harmful to society. Income is payment for services provided. If all income was equal that would mean that all services were equal. Proponents of income equality ignore the definition of income and instead emphasize the word equality. They make the erroneous assumption that equality is always good for society. Inequality has come to imply injustice, but while justice is always good for society, the benefits from equality depend on the circumstances.

A highly skilled neurosurgeon likely makes far more than a recent medical school graduate, and rightly so. It is not unjust for the higher skilled worker to receive a higher compensation for his or her work. Injustice would be two workers receiving different incomes based on racial or gender differences alone. Although the distinction between equality and justice is fairly simple on an individual level, as soon as the discussion becomes nationwide in scope there is suddenly a cry for solutions to this apparent travesty.

This argument also assumes that it is a social harm when one person’s income increases at a faster rate than another person’s income. An equal rate of increase between the lowest and highest brackets would only be positive if that equal rate is greater than the previous rate seen by the lowest bracket.

For example, income in the lowest quintile has increased 18% since 1979, and income for the highest quintile has increased by 65% over the same period. If income for all brackets had increased only 10% there would have been absolute income growth equality. However, nobody will argue that this situation is better for anyone. Who in the lowest quintile would not prefer 18% income growth, regardless of the growth in the other quintiles? Income growth equality is not always better than inequality, and consequently, inequality is not inherently a social harm.

Social activists seem to think income equality should be valued above economic growth. This is rooted in the misconception that one person’s gain is automatically another person’s lose. However, the market is not a zero-sum game, and sacrificing growth for equality would harm everyone, including the lower income earners.

According to the CBO study, incomes at every level are increasing; critics like to emphasize the faster growth of high-earners’ incomes, but they ignore the growth seen by the lower earners. Additionally, critics argue that income inequality hurts social mobility, but a recent study, led by Raj Chetty of Harvard University, found that social mobility has remained relatively stable over the past 20 years.

Equality alone is not enough to justify income redistribution. Proponents of income redistribution have failed to provide a real world impact of income inequality that would justify such “legal plunder,” to use the phrase of Frédéric Bastiat.

The modern push for income equality treats national income like a single income that should be distributed equally to every individual in the United States. Instead, national income should be viewed as a collection of individual incomes which result from the labor of individuals. Redistributing the reward for that labor is not justice; it is “legal plunder.”

According to Bastiat, humans typically want to avoid labor when at all possible and choose to plunder another man’s labor whenever plunder is easier than labor. “Legal plunder” occurs when a nation’s laws are corrupted in order to support this injustice. Possibly the greatest instrument for legal plunder in the United States is the federal income tax.

Although Income inequality is used to justify the progressive tax system, the income tax has done little to decrease income inequality. According to the Congressional Budget Office, income inequality has increased over the past 30 years despite the progressive tax system.

Often the programs intended to decrease income inequality only serve to increase it. Instead of increasing earned income, welfare programs often create incentives to earn less income in order to receive more welfare. After the minimum wage increase in Seattle, some workers asked for fewer hours in order to continue receiving government subsidies. Welfare programs provide the money to solve a problem, but they often ignore the humanity of the welfare recipients whose incentives may not align with government objectives.

The responsibility for removing income inequality should be placed on the workers not the government. “Legal plunder” has shown itself to be an ineffective remedy, and the government should respect the workers ability to increase their incomes without government subsidies. Income must be treated as the result of labor by human beings, not just numbers and dollar signs on a screen.

 

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Paul Lichlyter

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