In Defense of Inequality

During the 2008 presidential election, Barack Obama was asked if he would favor of a higher capital gains tax rate, even if the government received less revenue as a result. His answer: Yes.

When you stop to think about it, that’s a remarkable answer. By hypothesis, everyone is worse off. The owners of capital are worse off. The government is worse off. Poor people who depend on government are worse off.

Yet Obama’s answer wasn’t remarked upon. It was generally ignored. The reason: I think most people in the mainstream media took it as aberration. Maybe even a misstatement. And that is because the mainstream media doesn’t take the president seriously when he says he is against inequality — an understandable attitude, given that the first family just finished a 17 day, $4 million vacation in Hawaii.

But I have it on good authority that the president repeated that answer to the very same question in private fund raisers. So I’m willing to entertain the idea that he really means it. That implies that for Barrack Obama equality is a serious value — one that should be pursued even if it requires the destruction of wealth, less revenue for government, less welfare for the poor and compromising on other things that are also of value. Not only am I willing to take Barack Obama seriously, I’m willing to give the benefit of the doubt to Paul Krugman, Joe Stiglitz, Robert Reich and others.

Let’s admit it folks. Maybe these guys aren’t the hypocrites many of you think they are. Maybe they are really serious.

OK. So what does that imply?

Let’s take expatriation. After John Templeton renounced his citizenship and moved to Nassau (where there is no income tax), the federal government imposed penalties — to discourage other wealthy people from doing the same thing. That was because the government wants to tax them. But when a wealthy person expatriates, the distribution of income and wealth becomes more equal. Should we reverse course and encourage the John Templetons of this world to get out of town. If equality is a serious goal, we should at least relax the penalties.

At the other end of the income ladder, consider poor immigrants. Every time one comes to our shore, the distribution of income becomes more unequal. But the same could be said if the immigrant is rich. Any immigrant who isn’t earning close to the average income is going to make the distribution less equal as a result of his immigration. If equality is a serious goal, we definitely need a different immigration policy.

Then there is federal aid to the students at Harvard. Granted, many of them may be poor right now. But if they were smart enough to get into Harvard, their lifetime expected earnings are way above average. And what’s true of Harvard is true of Yale, Princeton, etc. In fact, an argument can be made that all aid to college students everywhere contributes to inequality. If equality is a goal, at least there should be a lot less of it.

Then there is he welfare state. To the degree that it encourages people to be poor or have children who will grow up to be poor, it is certainly not performing an egalitarian function. Instead of paying welfare mothers more money when they have another child, perhaps there should be financial penalties.

More generally, all means tested entitlement benefits contribute to inequality of income and wealth. The reason: they discourage work and income earning. Unemployment insurance benefits, Food Stamps, Medicaid — all these programs and more contribute to inequality. They encourage people to have less income and fewer assets than they otherwise would.

And as we have previously mentioned at this site, it’s hard to think of an institution that causes more inequality than the lottery, even though lotteries are a favorite source of funds for Democratic legislatures and Democratic governors.

But before we rush out and change all these laws let’s stop and reconsider. If inequality is a bad thing, there must be victims. Yet if penniless immigrants come to our shore, knowing that their arrival makes the distribution of income more unequal than it was and knowing that they will be at the bottom of the income ladder initially, then it’s hard to argue they are being victimized.

I know I would much rather live around billionaires than people who earn what I do. People with a lot of money create business opportunities, employment opportunities and even social opportunities that I would otherwise miss out on. If there were no rich people around, I would never have been able to sit in a box at Cowboy Stadium, or sail in a yacht, or drive as Aston Martin. In fact, if there were no rich people, there wouldn’t be any sports boxes or yachts or Aston Martins.

For almost any skill or attribute, think of a bell curve distribution. Most people are near the middle of the distribution, while the most accomplished 2% are way out on the right tail. Now think about how your life is richer and more fulfilling and enjoyable because of the 2%. If you could take a magic wand and remove the 2% who are the best football payers, how enjoyable would Sunday’s TV football games be? Would you watch at all if the players on the field were all of “average” ability?

The same principle can be applied to other sports (baseball, basketball, hockey, etc.), to music (what if there were no Beethoven, Mozart or Rachmaninoff?), to film (what if there were no Betty Davis or Humphrey Bogart?) and to singing (no Beyoncé or Bob Dylan or the Beatles?)

The most important inequality however is intelligence. What we loosely call “genius” is a person with an IQ in the top 2% of the IQ distribution. Have you ever thought what would have happened if some freak accident of nature prevented the top 2% from ever being born. If nature’s distribution of IQ were only slightly narrow than the one we experience, we never would have had a Euclid, a Galileo, a Newton or an Einstein. In the business world, we never would have had a Thomas Edison, a Steve Jobs or a Bill Gates.

Not everyone with a high IQ is a high flyer. In fact the vast majority are not. But all the great scientific discoveries and all the great innovations came from people out there on the right tail. Without them, life for you and me today would be little different than it was in medieval times.

So the next time you say a prayer of thanks be sure to thank whatever Gods may be for the fact that we are not all the same.

Comments (25)

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  1. Andrew says:

    “For almost any skill or attribute, think of a bell curve distribution. Most people are near the middle of the distribution, while the most accomplished 2% are way out on the right tail.”

    This is a very insightful way of looking at how inequality is actually beneficial to a thriving economy. It is true that without inequality, there would be no innovation and no incentive to create innovation.

    • Thomas says:

      All of the things that we take for granted that enrich our lives, like cell phones and the internet, would not exist if there was complete equality of wealth and intelligence.

    • Jay says:

      That is also a driving motivator in our society as well. Many of our personal goals are targeted to the betterment of our lives and striving to be on the right end of the distribution.

  2. Matthew says:

    “And that is because the mainstream media doesn’t take the president seriously when he says he is against inequality — an understandable attitude, given that the first family just finished a 17 day, $4 million vacation in Hawaii.”

    Yeah it is kind of hard to take him seriously when he is fresh off what would be a dream vacation for median income earners.

  3. Ken says:

    Excellent post.

  4. Bob Hertz says:

    Obama’s personal expenses on this vacation for his family’s food and lodging probably totaled about $250,000 — which is still an outrage if the taxpayers covered it all.

    The rest of the $4 million covered the expenses of secret service personnel, communications types, and the book-keeping charge for flying anywhere on Air Force One.

    His statements are inane, I totally agree, but enough of this “$4 million vacation” stuff.

  5. Robin Mayhall says:

    From TheWeek.com (http://theweek.com/article/index/235844/deconstructing-the-5-most-ridiculous-myths-about-barack-obama):

    “POTUS Tracker, compiled by The Washington Post, shows that from January 2009 to October 31, 2012, Obama spent all or part of 72 vacation days in a variety of places, mostly Hawaii in the winter and Martha’s Vineyard in the summer. That’s about 10 weeks away in three-and-a-half years, hardly extravagant. Through May 18, according to data from CBS’s Knoller, he also visited Camp David 22 times, spending all of part of 54 days there.

    “What about his predecessors?

    “[Skipping John Adams thru JFK; you can go to the link above to check those out, if you wish.]

    “· Lyndon Johnson spent 484 days in five and a half years at his Texas ranch.

    “· Ronald Reagan was away for 436 days, usually at Rancho del Cielo (his mountaintop retreat in California) or Camp David.

    “· Bill Clinton, who didn’t own a vacation home, loved to party with his elite friends in Martha’s Vineyard and the Hamptons.

    “· George W. Bush spent 32 months at his ranch (490 days) or Camp David (487 days) — an average of four months away every year.

    “Time off doesn’t mean goofing off. President Bush, for example, met with a variety of foreign leaders at his ranch. President Obama held a G-8 summit at Camp David. Just like you might check your email while sitting on the beach (you fool, you), presidents never really unplug. But if anyone deserves a vacation, it is the person who serves in the world’s most stressful and demanding job.”

    • Michael says:

      When the blog refers to Obama’s vacation it was not referring the fact that he was on vacation. He wanted to show how the President loves to talk about equality and then goes on a $4 Million dollar trip to Hawaii (something most of us cannot do).

  6. Thomas says:

    Just imagine the lack of revenue the NFL or MLB would pull in when the “athletes” are just average citizens.

  7. Martin says:

    Obama’s statement shows his eagerness for popularity. He wants to be remembered as the President that fought against inequality and that favored the poorer population. What he does not realize is that in the long run his measures are going to harm American economy and will leave the country worse off. Inequality is a good thing; it has been the reason capitalism has been successful.

  8. Morris Bryant, MD says:

    So what IQ range are you in, if you can actually pronounce Rachmaninoff?

    Great post! Enjoyed the angle you approached this topic with!

  9. Al Baun says:

    Equality has many faces and the reflections depend on which mirrors one chooses to look into. I believe the good doctor is pontificating on fiscal, class, and achievement equality, which is impractical to effect on a national level. What the doctor doesn’t see is that the focus of the current administration has been on equality of opportunity and tax obligations.

    For instance, what could President Obama have possibly meant with his capital gains comment? Why should your capital gains income be taxed at a 15% rate when my wage income incurs a 39.6% rate. Why are your earnings somehow more valuable than mine? I think the economic theory of “People with a lot of money create business opportunities” was cast adrift in the last national capitalist recession. True conservatism, which should dislike government manipulation of commerce, should agree that all incomes should be treated equally, and at the same rate.

    • Cliff says:

      Taxes on capital investment cause tremendous economic losses. We want people to be better off, not worse off.

      • Al Baun says:

        Stop drinking the Koolaid.

        [There also appears to be "little or even a negative" correlation between capital gains tax reduction, and rates of saving and investment, according to economist Thomas L. Hungerford of the nonpartisan Congressional Research Service.]

        http://www.finance.senate.gov/imo/media/doc/092012%20Burman%20Testimony.pdf

        [Comparing capital gains tax rates and economic growth in America from 1950 to 2011, economist Len Burman found "no statistically significant correlation between the two", even after using a "lag times of five years." Burman shared his data (shown in the chart) with several economists but none came back having discovered a historical relationship between the rates and growth over those six decades.]

    • vikingvista says:

      “Why are your earnings somehow more valuable than mine?”

      When it comes to wage income and capital gains, it is typically the type of income and not the person that our masters find more or less valuable to their collections, although the government exemptions do largely favor lower income earners. That is, whether it is you or your equal-income neighbor who appreciates an asset, the tax upon that asset’s sale is treated the same.

      Capital gains are nearly as commonplace in the population as wage income (consider that a portion of almost every wage lands in a 401k or other retirement investment vehicle)–even if most such gains are exempt from *ALL* capital gains taxes. E.g., Buffett may at times pay up to 15% effective on his capital gains, but most low and middle income earners pay 0% on their capital gains.

      But our masters have determined that if an asset had to appreciate more than about 15% + risk for it to be profitable, it would too much discourage individuals from acquiring and appreciating assets, and so result in a decline in the state’s ability to spend. Given that this investment mechanism (whether from a teacher’s 401k or from Warren Buffett’s stock purchases) is the primary source of productivity enhancements and therefore wage income growth in the economy, there is reason to believe that our masters are largely correct.

      A capital gains equivalent taxation scheme for wage income would not be to set the income tax rate equal to the capital gains tax rate. It would instead be to subtract the portion of your education and training costs from all the future income it generated, and tax that as capital gains. Fortunately for many wage earners, that is far too nebulous for our masters to engineer.

      An wage income equivalent taxation scheme for capital would not be to set the capital gains tax rate equal to the wage income tax rate(s). It would be to simply treat the sale price of the asset as an income without regard to its original purchase price. That would be far higher effective tax rate on capital gains than merely setting the capital gains tax rate equal to the wage income tax rates.

      “True conservatism, which should dislike government manipulation of commerce, should agree that all incomes should be treated equally, and at the same rate.”

      True conservatism, in my experience, is adamant about imposing all kinds of government manipulations on commerce. Their claims to the contrary are selective. To dislike government manipulation of commerce is to dislike any state extortion of economic actors.

      For all incomes to be treated equally, one cannot discriminate between monetary and non-monetary incomes or individual income levels, and one cannot equate a capital gain to a wage income. Different things are taxed differently. Wage income and capital gains are different things–apples & oranges–just as are imports, exports, land property ownership, and vehicle registration.

  10. Charles P. says:

    It is sad that there has to be measures to prevent people from renouncing their American citizenship. This is evidence that the tax system is filled with issues. If billionaires want to leave this country is because they believe they are being treated unfairly. I don’t think the problem is the amount they end up paying, is the fact that they are being taxed unfairly just because they are rich. Why would someone stay here if the government is in “favor of a higher capital gains tax rate, even if [that meant] the government received less revenue as a result”?

  11. Ronald Nate says:

    Great article! I only quibble with this insight: “Yet Obama’s answer wasn’t remarked upon. It was generally ignored. The reason: I think most people in the mainstream media took it as aberration. Maybe even a misstatement. And that is because the mainstream media doesn’t take the president seriously when he says he is against inequality…”

    The reason the comment was ignored is that, to the media, it was unremarkable. Of course higher taxes on the rich are warranted. The media agrees that the war on inequality is not about government revenue–it’s about “sticking it to” the undeserving rich. High capital gains taxes hurt the rich, therefore, whatever the other consequences, mission accomplished.

    It was not a misstatement, and not an aberration; it was business as usual for a progressive candidate running with the support of a favorable media.

  12. Wanda J. Jones says:

    John–Obama’s attitude, and those of his advocates, in seems, is that “I won’t charge you with racism to explain the poverty of black people, i will charge you with having so much more income and assets than the poor that it keeps them down, and that the way to help them up is to reduce your assets and income.” Stated like that, it is clearly wrong. Reducing the wealth of the rich will do almost nothing to help the poor.

    Wealth is not something that exists in a great cloud in the air–it is the result of work, either physical or intellectual. Being an absolute asset, the government is within its area of responsibility to the public to decide how that sum can be most fairly allocated. That the rich earned their wealth, or their parents did, is a reflection of the success of physical work or intellect, of of investing in those that perform well. It is not possible to have people of average IQ move up to the top 2%, but it is possible to diminish the future value of the IQ of the top 2%. We all just have to get used to the fact that Obama is a reverse racist disguised as a Robin Hood. The arrogance of his stance includes watching him actually believe that we don’t notice this because “I am always right. ” [Count the "I's" in his speeches.]

    Wanda J. Jones, President
    NCHI
    SF, CA

  13. Ron says:

    John you missed the point of Obama’s grandstanding against the current level of inequality in the U.S. His goal is not to create equality, that would require him creating jobs, removing people from welfare, lowering the number of food stamps, eliminating victim mentality of minorities, encouraging entrepreneurs from around the world, using our natural energy resources for middle class jobs, etc. Clearly from your, I think tongue in cheek, examples he must have another goal….what can it be? Maybe more “equally poor” with varying levels of dependence on government (hence future votes for more government). For the poor – welfare, handouts. For the middle class – healthcare, college funding. For the wealthy (and connected) – crony capitalism and favoritism. For women – free contraceptives, equal pay regardless. For unions – card check, an accommodative NLRB. For insurers – guaranteed profits and a bail out of losses. It all adds up to 50+ election victories with just a little cocaine and drug addiction for everyone, just so they can stay on the reservation. Who said a community organizer was unprepared for the presidency?

  14. Dan M. Krausse says:

    John,

    This blog should be on every editorial page in the USA!!! It came from a genius.

  15. Encore Dental Partners says:

    nice informative blog….thanks for sharing this with us.

  16. Breck says:

    I have a good friend who tells me that the statistics describing inequality of incomes indicate that wealth is, in fact, flowing from the poor to the wealthy. It somehow makes sense to him that because a few Americans are very wealthy and getting wealthier, it can only be because wealth is flowing into their hands from all the rest of us. He agrees that there is not a fixed amount of wealth such that if the rich get more then the rest must get less, but nevertheless, to his mind, there must be a net flow of wealth from poor to rich. And my friend is a Phd astrophysicist! The left is so heavily invested in this idea that inequality is a mortal threat to democracy that logic fails them. I think this comes from the thinking of Karl Marx, who feared that capital would, over time, become concentrated in the hands of a few people at the top, who would then viciously exploit the world’s workers. Of course, this hasn’t happened anywhere except in leftist dictatorships, and certainly not in the U.S., but this Marxist vision, IMHO, is what drives this fear of inequality. Let me know if I’m wrong about this.

  17. m2inor says:

    When those in the middle complain about inequality, they really want Lake Wobegon where everyone is above average.

    Great way to approach the topic.