Monday, January 23, 2012

Squeezing the "Income Inequality Gap"

   The New York Times reports reported Saturday on a preview of the President's State of the Union speech.  While the article is loaded with fodder for conservatives to target, there is one item that not only appeals to the class warfare rhetoric that President Obama has turned to time and again, but is also a tacit if inadvertent acknowledgement of a point conservative economists have made for years.  Although the text of the speech is undoubtedly still in draft form, the reporter's sources say that "...Mr. Obama will again call for changing the corporate and individual income-tax codes so the wealthy pay more, both to finance government investments and to alleviate the rise in income inequality in recent years."
   The concept of taxing the rich to finance government spending is so entrenched in liberal planning that it barely needs to be explicitly stated anymore, but the recent focus on the growing gap in income inequality (itself a subject of many dubious claims) makes the second half of that statement worth examining.   The assertion that higher taxes on the rich will somehow narrow that gap is specious.  This egalitarian idea is that if the government takes more from the wealthy in taxes (and by implication, but by no means in reality, less from everyone else,) the wealthy will have less money and therefore the gap will shrink.  However, "income inequality" refers to gross income, not net after-tax income.  Certainly a wealth-transfer is taking place, but the gap in question remains unchanged.
   The only way "taxing the rich" can truly shrink the inequality is by reducing how much income the wealthy obtain in the first place, and somewhat ironically (or cynically,) this is the very economic-growth-killing effect that higher taxes produce.  As Jim Saxton's Joint Economic Committee report found in 1997, the best way to reduce the level of an activity is to tax it.  The Obama administration may in the end achieve its intended goal of narrowing the income gap, but only by piling more weight on top of an already staggering economy and crushing everyone under the load.

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