Rising Income Inequality: An Excuse for Bigger Government: Part II

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Link to Part I of Rising Income Inequality: An Excuse for Bigger Government

The argument that rich people need to be taxed further to prevent income inequality from rising further doesn’t make sense economically. According to the Michael Schuyler of the Tax Foundation, if esteemed economist Thomas Piketty’s tax plan to change the face of equality in America were put into place, it would be ineffective at preventing income inequality from increasing and would not help the poor at all. “The basic version of Piketty’s wealth tax would impose a tax rate of 1 percent on net worth of $1.3 million and $6.5 million and 2 percent on net worth above $6.5 million. Piketty contemplates additional tax brackets, including a bracket of 0.5 percent starting at about $260,000” (Schuyler).

Schuyler completed two case studies about Piketty’s wealth tax. Both find that it does nothing to help the poor. The first: the basic plan of “1 percent on net worth between 1 and 5 million euros, and 2 percent on net worth above that.” Using purchasing power parity and rounding up a little, in US dollars $1.3 million is the starting point for the 1% tax and $6.5 million is the starting point for the 2% tax. The second: “Piketty’s recommendation for a more comprehensive wealth tax, adds a starting bracket of 0.5 percent on net worth between 200,000 and 1 million euros. Converted into dollars and slightly rounded up, the bracket runs from $260,000 to $1.3 million” (Schuyler).

Those seem like small tax percentages, but in reality will augment the possibility of injury to the economy. A wealth tax is equal to a much higher income tax – an example being “if the pre-tax return on an asset is 8 percent, a 1 percent wealth tax on the asset would take away one-eighth of the income. That is the same tax bite as a 12.5 percent income tax rate” (Schuyler). Also, a majority of some people’s wealth is capital; its accumulation is delicate to expected after-tax returns. This wealth tax would hit capital hard, and in turn, job formation, productivity, and innovation (Schuyler).

The first case “estimates that after the economy has adjusted to the wealth tax, the stock of private business capital will be down 13.3 percent, the wage rate will drop 4.2 percent, there will be 886,000 fewer jobs, and the economy’s total output of goods and services (GDP) will be 4.9 percent lower than otherwise” (Schuyler). The poor will obviously not been helped, but hurt by the supposed wealth tax that was meant to decrease the income gap. The standard of living overall will decrease, not just for the poor. (Schuyler).

The second case increases the number of people having to pay the wealth tax dramatically. It estimates, after adjustments, that “the capital stock will be 16.5 percent smaller than otherwise, wages will be 5.2 percent lower, 1.1 million jobs will be lost, and the overall economy will produce 6.1 percent less output than otherwise” (Schuyler). The severity of the effects of the tax has just increased, not the overall effects. Piketty is but an example of someone coming up with a plan that is believed to decrease inequality if implemented, but in reality, would lead to big problems and big losses if put into action. “The Tax Foundation model estimates that the GDP loss, expressed in terms of the 2013 economy, would be about $800 billion annually under a two-tier wealth tax of 1 and 2 percent. The estimated loss would rise to about $1 trillion annually if a half-percent bracket on smaller wealth holders were also imposed” (Schuyler). The attempted fix to income inequality is estimated to decrease the supply of services and goods, decrease the number of jobs, and lower wages. Everyone would be affected and hurt (Schuyler).

Real factors of income inequality are good news of increasing standards of living. For example, more people going to college causes inequality. The Tax Foundation’s Alan Cole found that in 1968, there were 7 million college students in the US and now there are over 200 million (Cole). Because many college students either delay working or earn very little money at low-skilled jobs, this shift in the number of students increases income inequality. However, a more educated American population is great news for everyone (Smith & Freeman).

In addition, healthcare innovation enabling elderly to have longer retirements is a factor of “rising” income inequality. Mark Perry of the Tax Foundation found that the number of active workers per retired worker has decreased almost 32% since the 1970's (Aging Population). Most retirees using their savings instead of income after retirement results in less wealth for the elderly. The Economist says that since the 1960s, the average number of years people spend in retirement has doubled (The Economist). However, retirees not living from direct incomes primarily doesn’t make them poor nor do retirements hurt productivity (Smith & Freeman).

And most importantly, another reason for income inequality “increasing” is increasing income mobility (Smith & Freeman). Almost 60% of taxpayers who began in the lowest income group in 1999 moved up to a higher income group by 2007. The myth of the population decline of the middle class is busted. Because of increasing income mobility, everyone will have a better standard of living (Hodge & Lundeen).

Interestingly, 40% of people in the highest income group dropped down to lower income groups within eight years of the time that they moved to the highest income group. This is a direct denunciation of the misconception that rich people stay rich and take up a large share of the nation’s wealth for long periods of time (Hodge & Lundeen).

Cole, Alan. "Income Data is a Poor Measure of Inequality." 2014. Web. 1 April 2015.

Freeman, Daniel J. Smith and Rachel H. "Income inequality may actually be good news." AL.com 6 February 2015: 1. Web. 6 February 2015.

Hodge, Scott A. and Andrew Lundeen. "Americans Are Economically Mobile." 2013. Web. February 6 2015.

Perry, Mark J. "Can Aging Population Explain Income Stagnation?" Carpe Diem 23 October 2011: 1. Web. 6 February 2015.

Schuyler, Michael. "The Impact of Piketty’s Wealth Tax on the Poor, the Rich, and the Middle Class." 2014. Web. 8 April 2015.