Bastiat’s Bastions

One of my favorite topics to teach in economics classes is that of the income distribution. The very name is a pet peeve of mine because it implies that income has been distributed to people rather than earned by people. Compounding the confusion, the classic analysis focuses on yearly snapshots of income, whereby the income being measured each year is earned by different people. A much more realistic indicator of well-being is to follow the income of the same individuals over time.

When we follow the same people over time, we learn that a majority of taxpayers earn very different income levels through the years (see this report.) One of the significant findings of these types of studies is that lower income individuals in any given year do not remain in the lower income categories forever. In fact, the Treasury study that I’ve linked to reports that “median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the high income groups.” That’s right, the “poor” did better.

Needless to say, I do not favor any sort of active plan to “re-distribute” income, least of all because it wasn’t “distributed” in the first place. Given this view, it should be no surprise to learn that I deplore the tax policy proposals of Obama (though, truth be told, I have no plans to vote for either of the major candidates). Yesterday morning, my wife heard something on the radio that was one of the best parody-type critiques yet.

The story was basically this: If Obama wins, the IRS will institute the new 1040-O; people will report their income and cut the government a check for the full amount; the government will then average all the income and send a check for the average amount to everyone. Perfect income equality will finally be achieved.

Clearly, this was meant as a joke. Still, think through some of the logical conclusions here, and it’s easy to see some of the economic problems with the income equality crowd.

For example, let’s say you win the lottery. Sorry, that’s way above average; you simply can’t keep all of that income.

What about overtime? That can’t be fair, can it? What about a business owner who lucks out and has a really good year? Nope, sorry, that’s not fair; it’s above average.

Or, for a seemingly more pedestrian example, think of someone who starts off in a low-wage, entry-level job. At first, this person will do much better under the 1040-O than under current law. But what would happen as this person tries to move up the economic ladder? Why work toward a mid-level management job or higher paying executive slot?

This last example represents the typical pattern for most workers – start off at a lower wage, work up to a higher wage. And herein is the problem: a redistribution scheme works against the incentive to be productive and earn more money. In the extreme, it destroys the incentive, and we end up with millions of people sitting back waiting for their checks. I guess we could just print the money. Oh, wait….

NM

This entry was posted on Tuesday, November 4th, 2008 at 9:35 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.