Covering the Front and Back Pages of the Newspaper
May 19, 2003
POLITICS: Ignoring Incentives
Following up further on my post on Conservative Truth #1 - that the results of government initiatives will inevitably be affected by how the initiative changes individual incentives - I couldn't have asked for a bettter illustration of how some purportedly mainstream liberals completely ignore this point than this op-ed piece in last Thursday's New York Times by Yale Economics Professor Robert J. Shiller. Shiller argues that inequalty of wealth is "truly frightening":
According to the Census Bureau, the bottom 40 percent of American families earned 18 percent of the national income in 1970, but by 1998 they earned only 14 percent — and that figure could fall to 10 percent before too long. On a global scale, too, inequality is a problem. Per capita gross domestic product in India in 2000 was only 7 percent of that of the United States, and for China the figure was 11 percent. Such a difference could increase the possibility of greater inequality within America.
(Note that he identifies America's wealth relative to other nations as a problem, which becomes more ominous when you examine his proposed solution). The "cure":
[F]uture tax brackets and rates should be contingent on the extent of future inequality. Tax law should be based on a principle that might be called inequality insurance: the taxes would be collected in such a way as to insure that the level of inequality, after taxes and transfers, does not exceed the levels present when the law was enacted. If such indexing were put in place today, the brackets and rates would adjust whenever inequality worsened beyond today's levels.
If the nature of the economy changes, and a small number of people capture the lion's share of pretax income, then the tax rates on them would automatically rise, and the tax rates on lower-income people decline, until today's level of inequality was restored. Higher taxes on the high incomes would be imposed exactly at a time when the few are suddenly becoming enriched relative to the many. There would be no delays while politicians debated whether taxes should be raised or cut.
This is just daffy. Shiller blandly asserts that "[t]he new system could be designed so it would always be just as easy for people to attain the same relative economic status that the upper segments of society enjoy today. There is no reason to worry that more wealthy people will feel any less of an incentive to work hard than they do now." But his automatic-tax-hike program would surely place an escalating burden on high earners, and throw in an added level of uncertainty to boot. Worse, the program has only a fig leaf of concern for people at lower income levels; the program has absolutely nothing to do with raising the overall standard of living and everything to do with freezing the ceiling on today's highest earners in place forever.
Then there's this:
Reframing the tax system in this way could help deal effectively with one of the world's most serious problems, which is the potential for growing inequality. Highly talented, educated and hard-working people living in less developed countries often earn only a small fraction of what their counterparts in advanced countries earn. As Americans increasingly compete on a world market, there is a serious risk that their jobs will be given to people overseas and their incomes will drop precipitously — producing sudden profit opportunities for other Americans and creating sharp increases in inequality here.
So, we should tax ourselves more if other nations prosper?
This is an economist from one of the nation's leading universities, writing in what is supposed to be the nation's leading newspaper, and yet he completely ignores everything we know about the effects of high taxes on human initiative. Unbelievable.