The Paucity of the Pro-Inequality Argument

After decades of rising income inequality (and a nudge from Occupy and Thomas Piketty), it's finally "cool" to talk about taxing the hell out of the grotesquely wealthy in order to make our world somewhat more equal. Let's examine an argument against this sort of taxation, to see why it is weak.

The place to go for the official response of wealthholders to any perceived populist assault upon their vast wealth: the Wall Street Journal's op-ed page. That's where John Steele Gordon today publishes his argument against high taxes on the very, very wealthy—a policy prescription advocated, in various forms, by Piketty and by many other liberals, economists, and just plain regular people in search of a solution to the wealth and income inequality crisis. Gordon's argument is that today's unprecedented concentration of wealth among a tiny minority of billionaires is just part of a long and healthy process of invention:

The great growth of fortunes in recent decades is not a sinister development. Instead it is simply the inevitable result of an extraordinary technological innovation, the microprocessor, which Intel brought to market in 1971. Seven of the 10 largest fortunes in America today were built on this technology, as have been countless smaller ones. These new fortunes unavoidably result in wealth being more concentrated at the top.

Fine. Rich people today got rich from computers somehow. What's this have to do with a moral or economic justification of wealth inequality? Well, Gordon argues that today's microprocessor fortunes are just the latest version of yesterday's fortunes made on the backs of sailing ships, or railroads, or industrial machinery: cutting edge technology of its day, which improved the conditions of society as a whole and greatly enriched those businessmen who controlled it.

Fine. But where's the justification for all that economic inequality?

The number of new economic niches created by cheap computing power is nearly limitless. Opportunities in software and hardware over the past 30 years have produced many billionaires—but they're not all in Silicon Valley. The Walton family collectively is worth, according to Forbes, $144.7 billion, thanks to the world's largest retail business. But Wal-Mart couldn't exist without the precise inventory controls that the microprocessor makes possible.

The "income disparity" between the Waltons and the patrons of their stores is as pronounced as critics complain, but then again the lives of countless millions of Wal-Mart shoppers have been materially enriched by the stores' staggering array of affordable goods.

That is certainly debatable! But setting aside your feelings on Wal-Mart's effect on communities, the question remains: what is the moral or economic justification for allowing these huge wealth disparities to persist, rather than doing something to remedy them through taxes? Here is the only part of Gordon's essay which actually addresses that question:

Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs—and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won't be taken.

Aha. And here is where the farcical nature of the anti-tax brigade is laid bare. "Potential reward must equal the risk or the risk won't be taken." Gordon would have you believe that nobody would start a company if the potential reward were not tens of billions of dollars. It is simply not true. No one needs a fortune of billions of dollars in order to be convinced to become an entrepreneur. Tons of people would be happy to do it for far less. And even if people are able to earn billions, taxing away half or three quarters of their earnings over some absurdly high amount will not make them stop trying to make money. Even if only 25 cents of every new dollar is going into the businessman's pocket, it's still going into his pocket. A rational and reasonable progressive tax scheme simply does not stop people from wanting to make things—or even to get rich! People can achieve many things, including vast wealth, without becoming multibillionaires. This line of argument against taxation on the very rich to remedy inequality simply doesn't make sense.

"Potential reward must equal the risk or the risk won't be taken." The people who enlist in the U.S. Army for salaries of less than $30,000 per year might be surprised to hear that. If we can tax billionaires at 80% and give those soldiers better health care, or feed the homeless, or just make society a bit more equal and fair, then we should. The billionaires will still be fine.

[Photo: Getty]