Former U.S. Deputy Treasury Secretary Robert Altman writes in the Financial Times that increasing income inequality in the U.S. has three causes: the increasing role that information technology plays in work; a supply shortage of workers with the requisite IT skills to take full advantage of this shift; and weak rates of graduation from high schools and universities.
The irony is that the first policy proposal Altman offers to remedy what he sees as the problem of income inequality is to make the U.S. income tax more progressive—that is, to increase the tax rates on folks who earn higher salaries.
There are a couple of problems with increasing tax rates given his diagnosis of the causes of U.S. income inequality. To understand the first of these we need to step back to consider why Altman might think that the three factors he identifies would cause increased income inequality.
First, jobs that better leverage information technology allows those workers to be more productive. More productive workers earn more money, and income inequality increases as a result of these workers receiving higher pay relative to workers whose labor employs less information technology. This is just a special case of the conventional wisdom in economics that labor productivity is a function of the combination of capital and labor. The marginal product of labor will increase by adding capital to a given amount of labor, and hence the income for that labor will increase as well.
Secondly, Altman argues that the supply of workers with IT skills is low relative to demand. This contributes to income inequality because high demand for workers with IT skills relative to supply means that employers seek to attract more-skilled workers by paying them higher wages. This is just supply and demand in the labor market.
Finally, Altman suggests that schools are underproducing workers who can supply the IT skills that employers want. Therefore, again, because supply for these workers is less than demand, and the outcome is that workers with the requisite IT skills receive higher incomes. This exacerbates income inequality relative to workers who do not graduate from high schools or universities.
Altman’s proposal to increase the progressivity of the income tax means that he proposes to reduce income going to workers with scarce IT skills relative to what they earn right now. His proposal would reduce the incentive that people have to invest in their IT skills. That is, Altman’s proposal decreases incentive that people have to acquire the very skills that Altman argues cause income inequality because they are already in short supply.
High wages in a market signals to workers that demand for their skills exceeds supply in that market, and so attract workers into that market. The upshot of Altman’s proposal to increase the progressivity of U.S. income taxes would be to exacerbate the very factors that he thinks are causing the inequality that he laments.
The next odd thing about Altman’s proposal to increase income-tax progressivity is that, for Altman, increasing tax rates is its own reward—an increasingly progressive tax by itself would flatten out income inequality, and therefore meets his objective to reduce income inequality irrespective of what any additional tax revenue would be spent on.
Altman’s goal here is brute redistribution. His justification for raising taxes rates on higher-earning Americans depends neither on the need to invest additional revenues in public goods nor in policies that would increase incomes for lower-earning Americans. Even if the government just burned the extra cash raised by increasing taxes on higher-income Americans, Altman’s goal of reducing income inequality would be reached.
Basically, Altman proposes higher income tax rates as a sort of sin tax on people who earn higher incomes. The irony is that Altman next proposes increased investment in education to help reduce income inequality. While one can argue about the specifics of education policy, Altman’s proposal here at least has the benefit of aiming to reduce inequality by increasing the wages of low-paid workers. This avoids the perversity of reducing incentives that low-paid workers have to increase their IT skills, and then taking away income from those workers who nonetheless obtain the skills that Altman believes more of us should have.
James R. Rogers is Associate Professor of political science at Texas A&M University and editor of the Journal of Theoretical Politics.
RESOURCES
Robert Altman, No More Inaction on Income Inequality
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Comments:
IT and other "knowledge industries" are fine for the smarties (who don't need help in the first place) but a compassionate society must find a way to encourage an economy that features productive roles for everyone, regardless of that one relatively unimportant (from a Christian perspective) aspect of our lives. How do we do this? I wish I knew. I do know that we are in danger of abandoning those of lower IQ for morally dubious reasons.
Here's another thought though. I suspect that alot of geniune Catholics are sincerely conflicted about resisting the urge to support raising taxes on so-called rich people because on the face of it redistributive proposals seem just and very likely to work. (BTW these days "rich" people are now two hard working successful parents each making $150k, not a person who on Wall St. may have walked away with $3B in 1 year, but I digress.) But, leaving the economics aside for a minute, and whethere tax increases on people doing well ever actually have their intended effect, from a truly Catholic perspective, income equality is a distraction, a side-show and in a country where even the poorest are rich by world standards, it is often incorrectly equated with Catholic notions of caring for and identifying with the poor.
Instead of focusing on what others have, and on reducing every societal problem to the amount of money in a person's pocket, why not work with what we have by pointing out that true happiness and personal dignity and therefore economic independance can only come from within. The real root cause of many of the problems in America that are often too easily laid at the feet of the so-called rich is a lack of personal dignity, purpose in life and support systems like the Church that do not reduce success to money. The Catholic Church is the number one creator of wealth in the world precisely because it puts first things first.
"You pretend to pay me, and I pretend to work."
"Communism: an equal sharing of poverty."
"The problem with socialism is that eventually you run out of other people's money." --Margaret Thatcher
Here's one from our own shores:
"It's not that our liberal friends are ignorant; it's just that they know so much that isn't so." --Ronald Reagan
And one that applies, though far older than communism or socialism:
"The love of money is a root of all the evils." --The Apostle Paul, 1 Tim 6:10
The recipe for socialism is this: mix three parts envy with two parts pride. Add a faulty understanding of human nature, and a cup each of moral blindness and scriptural ignorance. Cook for a lifetime of studying "public policy" and-do gooding for the masses who don't understand as well as you do, and you have simultaneous economic, personal and societal failure. All you have left to do is make a circuit of the economic "cooking shows" like the Financial Times and enthusiastically smile as you taste your revolting creation.
Whatever the cause it is clear to me that income equality is no guarantee of equal results. I therefore propose that we should guarantee those results by having the state decide what it is that one can do with the money they have by creating a credit system that charts purchases and based on a equivalency table make sure that no ones income produces goods or services that exceed their neighbors, within some predetermined plus or minus amount. After all why should the fact that someone has skills that others lack give them a leg up in getting stuff. It's not fair.
†
Imagine it. A young man and his "partner", a women he secretly plans to enter into "union" with at a secret ceremony to be held that night in what was once a church but is today a derelict and abandoned government community hall, walk into a government store and attempt to purchase a cross. Their purchase sets off the government computer; they've accidentally gone over their monthly quota of intolerant transactions; they're confronted outside the store by policy advisors from the local branch of the department of progress, tolerance, love and acceptance and asked to explain their overdraft. The young man is sweating, it's his second infraction in 2 months and he can't afford to lose his job before the ceremony. The women wonders if this might mean they'll lose their spot for a "youngling" and have to wait another year. There are few "younglings" available and the healthiest almost always end up going first to couplings who've been unjustly denied the opportunity to translate their love into new young ones by the intolerant, regressive forces of biological evolution, which by now researchers understand first came into being as a result of ancestral heterosexism that became encoded in our dna. Fearing the possibility of the voluntary-mandatory 24 hour re-education seminar and missing their chance to "unite" that night they wait for the outreach officer to look down and bolt.
Ok so I am not a very good story teller but you get the jist. A Logan's Run for 21st century America the equal.
Correlation doesn't imply causation. You may have a case showing causation but I'm having a hard time seeing that in America. Even the poor in America are rich when compared to most of the rest of the world. Big TVs powered by satellite dishes, cars, a house (though rented), etc. If the rich were actually oppressing the poor, this would be more convincing.
In fact, it is Washington and the swarm of human bedbugs that live there that are oppressing the poor by sucking the blood of the poor and intoxicating them with envy of the rich. They throw programs at the poor that destroy their families, and create a permanent underclass for the purpose of patting themselves on the back (charity with other people's money) and maintaining a voter base. They plunge us, our children and our grandchildren (the ones that survive their death machine called abortion) into unsustainable debt to keep their party going.
That, and the paradoxical party-now, pay later and near-slavery mindsets of most of the American people (I can't live without my bedbugs) that are the sources of instability that I see.
I believe that our educational bureaucracy will be of much greater help when it will allow good teachers to innovate, and then support their innovations when they produce results. Unfortunately, the experience of the late great Jaime Escalante shows that proven success can be punished when some arbitrary sacred cow is disrespected - like the mandated maximum number of 35 students in a given class, or the length of the school day:
http://en.wikipedia.org/wiki/Jaime_Escalante
Mastering certain subjects takes very large amounts of time, much more than the rather limited school day. I would venture to guess that to comprehend the Calculus AP test, part AB, would take two to three years of study, two to three hours a day, more on weekends and during the summers (but the spiritual rewards for that amount of discipline are great). Then the subtleties of part BC demand even more time.
In this respect, our students need and deserve the maximum of flexibility from the educational bureaucracy - it should accommodate itself to the proven needs of the given subject, not the other way around.
Someone interested in IT would not switch to accounting for tax reasons, because the marginal rates would be the same for both professions. Moreover, few people choose professions based on after-tax income. Rather they look at the gross wage scales and then decide. How they manage their money post-graduation is a different matter entirely.
And as Steve Macdonald above mentions, the big issue is future employability of the people that have been driven out of the workforce by the internet, automation and off-shoring. Ideally, technology would have given us all shorter work weeks. Instead we have some tethered to work 24/7 by electronic devices, while others don't work at all.
It's that asymmetry that is the problem.
http://blog.american.com/2012/04/obamas-inequality-argument-just-utterly-collapsed/
So mr altman's theory here is that the inequality will correct itself if left alone, in the same way that high prices for corn will attract higher levels of production for corn, driving down their prices. Of course, this assumes a nearly frictionless market, that the after tax-income is a significant determinant in how people choose a career, and even more ridiculously, that lack of aptitude plays no meaningful role the in limiting the supply of high skilled tech labor.
The low supply of high skilled tech labor has almost nothing to do with lack of incentives. Financial incentives are not the bottleneck, increasing them marginally (or greatly) will not likely help, and lowering them marginally will not hurt. Incentives are inherently relative. If the after tax pay of high paying jobs is still high in relative terms, there will remain a built-in incentive. If you literally equalized everyone's pay, you would of course have a serious problem, but since no one is proposing anything remotely like that in degree, this remains a straw man argument.
I see conservatives make this error frequently. Unemployment benefits do not incentivize employed people to quit their jobs, because the unemployed person is still significantly worse off, despite the unemployment check. Similarly, lower after tax income for the wealthy and upper-middle class does not disincentivize people from seeking higher paying careers any more than it incentivizes higher income individuals to seek lower paying jobs.
What we see here is a fundamentally unsophisticated and shallow understanding of how people actually make decisions.
This is not an argument for equality of incomes or wealth. In the case of gross disparity, quantity can become quality, just as there is a range of temperatures at which water remains water, but above or below that, it becomes a solid or a gas.
I do not say his policy is right: merely that it has a respectable, democratic pedigree.