There Is No Income Inequality

Let us make one thing clear right now: there is no such thing as income “inequality”. There are income differences, but no income “inequalities”.

The very term “inequality” has been constructed to imply a moral content in differences between people’s incomes (or wealth). Every time we use the term we imply – deliberately or inadvertently – that income differences are problematic and need to go away. But if the premise of any discussion of income differences is that the differences are somehow immoral, then there really is not going to be a dispassionate conversation about those differences.

There is a crucial distinction between “income inequality” and “income difference”. The former term, again with its moral content, implies that there is a role for economic policy – in other words government – to play in how people earn their money. This involvement, in turn, would come in the form of measures correcting differences between people’s incomes.

Once proponents of government intervention in people’s incomes have won the conceptual debate they move on to the policy goals for such intervention. We know all too well what those goals are: even though government expansionists do not spell it out on a daily basis, their goal with income interventionism is to eradicate differences between what people have to spend each month. A colossal government apparatus has been created for this very purpose – we know it as the welfare state – which is capable of redistributing astounding amounts of money between citizens. The Tax Foundation provides a good overview in a compilation of data on income redistribution, with the following main conclusions:

  • The federal income tax code has been more progressive, i.e., more punitive of higher incomes, in the past five years than during any five-year period since 1979;
  • Since at least 2004 and the enactment of the Bush tax cuts, the top one percent income earners have been paying more in federal income taxes than the bottom 90 percent;
  • At the top of the last business cycle, in 2006, the top-40 percent of U.S. income earners redistributed $1.2 trillion to the bottom-60 percent income earners.

The first conclusion indicates that both the Reagan and the Bush tax cuts vastly benefited income earners in lower brackets. The second conclusion shows that while Congress has cut federal income taxes, they have also distributed the tax burden upward in income layers. If any “inequality” exists in the U.S. economy, it would be the tax code that asks less than 1.4 million people to pay more in taxes – in actual dollars -¬† than more than 120 million of their fellow citizens together.

The third conclusion drawn by the Tax Foundation illustrates well the redistributive power of the American welfare state. Splitting the $1.2 trillion redistributed to those in the receiving three quintiles gives each employed person in those quintiles an average of $14,692 per year.

What have those people done to receive that money? Nothing, other than not make enough money to disqualify.

Herein lies the core of the problem with the concept of “income inequality”. The income earners who constitute the three lowest-income quintiles in the data quoted by the Tax Foundation are in those quintiles for a reason. They have chosen a career path that does not pay well; they have chosen to not pursue a college degree or trade diploma that opens high-income tracks for them; or they have made other personal choices that affect their ability to earn more money than they actually do.

By contrast, the members of the two highest quintiles have made career, education and other personal choices that have allowed them to climb the income ladder.

These are common-sense points that should raise no eyebrows. But the government expansionist proposing legislative action against income “inequality” will have more to say. He will suggest that it does not matter what choices people make; each one of us has the right to a certain standard of living simply because of our existence as fellow humans.

At the heart of this moral pitch for government action against income “inequality” is a suggestion that all human beings have the right to the same satisfaction of needs. A government expansionist would claim that Jack’s need for a three-bedroom house for his family is as important as Joe’s family’s need for the same-sized house. When these “equalists” can set the public policy agenda they create redistribution programs that elevate the ability of low-income Jack to buy that three-bedroom house to the same level as Joe’s ability.

The problem for the redistribution activists is that they can only help Jack by depriving Joe of his ability to buy a nicer four-bedroom house. The ethical principle behind redistribution is, namely, that humans have a right to have their needs satisfied. But when government confiscates¬† – in other words taxes away – parts of Joe’s income it actually deprives him of his ability to fully satisfy his needs. As a result, the ethical underpinnings of policies against income “inequality” lack consistency: eventually it becomes impossible for the redistributionist to provide a logically consistent, universally applicable distinction between what needs people have the right to, and what needs they can be deprived of.

When public policy is based on ethical principles that lack logical consistency they ultimately become arbitrary. When the principles validating policy initiatives are arbitrary, they give legislators uncheckable, unbalanced powers to legislate and interpret that same legislation as they see fit. Arbitrariness effectively means endless powers in the hands of government. Endless power is an express route to tyranny.

A redistributionist would disagree, pointing to Europe’s parliamentary democracies as a sign that you can combine the welfare state and democracy. But that argument reduces the concept of “tyranny” to a technical issue of who gets to decide who should govern a country. It omits a person’s economic actions, preferences and desires from the picture. But a person’s right to the proceeds of his work is as unabridgable as his right to speak his mind, write down and publish his thoughts, to travel and live wherever he wants to.

The redistributionists have lost the moral argument based merely on the logical inconsistency of their case. But as is well known to avid students of economics, they have also lost the argument based on the economic outcomes of their own policy initiatives. Europe, the continent where redistributionists have had the strongest public policy influence outside the Soviet Empire, is sinking into a hole of industrial poverty, pulled down by its increasingly unbearable welfare state.

It is time that their losses translate into practical policy. It is time for economic freedom to set the legislative course, in Europe’s parliaments, in U.S. Congress as well as in our state legislatures.

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