TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, April 23, 2012

The Inequality Obsession: Mark Zuckerberg and the EITC

Wall Street Journal: The Inequality Obsession, by Walter Jenkins:

Income inequality is a strange obsession, at least to the extent the obsessives focus their policy responses on trying to adjust the condition of the top 1% rather than improving the opportunities of everyone else.

Income inequality could be a sign of real pathology in authoritarian societies where entrenched groups use government-granted privileges to protect themselves from competition. By and large, that's not the case in the U.S., where most see the market actually increasing the competitive advantages of the educated, skilled, hardworking and talented.

Though it's always good to be on guard against political favoritism, the U.S. exhibits mostly a giddy process of wealth creation by people from middle-class backgrounds who start companies or become Wall Street traders or CEOs or celebrity performers in entertainment and sports.

Generalizing about the distribution of incomes is an academic specialty seemingly incapable of freeing itself from tendentiousness. Take a popular study by Thomas Piketty and Emmanuel Saez, two French-born researchers, claiming U.S. income inequality is higher than anytime since the 1920s.

Their result comes from choosing to look at income that leaves out transfers. Unlike the 1920s, Americans today have the opportunity partly to live off Social Security and Medicare. They can decide to do without reportable income. Also left out of the calculation is the large share of compensation accounted for by untaxed health insurance.

Too, the tax code has changed. Income is realized under today's code that wouldn't have been realized under previous tax codes. Owners of capital buy and sell much more easily, and the tax system creates much less incentive for them to sit on their holdings and report less income.

For the record, so sensitive are the inequality generalizations to how you define income, and whether household size is taken into account, that the claimed shift toward greater inequality can be made easily to disappear, especially when consumption rather than income is measured.

And, as always, the solution to income inequality amounts to persuading the rich to report less income. As CNBC's John Carney has shown, Facebook founder Mark Zuckerberg could avoid ever reporting any income simply by borrowing against his assets to meet his living expenses. "Perhaps most bizarrely, Zuckerberg might be eligible for an Earned Income Tax Credit if he keeps his personal income under $13,000," writes Mr. Carney.

This would make America a better place how? Yet, at bottom, such cosmetic fixes are the main outcome from using higher tax rates to "correct" income inequality. ...

Ditto the return of tax reform to the agenda. Tax reform promises to improve the opportunities of all while sponsoring less tax evasion, less distortion of investment priorities and less politically corrupting pursuit of loopholes, all of which are the certain and inevitable corollary of high tax rates enacted to salve inequality neuralgia. ...

As Freud put it, "Everyone must be the same and have the same. Social justice means we deny ourselves many things so that others may have to do without them as well."

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It's becoming harder and harder to tell the difference between the WSJ and the Onion.

Posted by: anonprof06 | Apr 23, 2012 8:25:49 AM

If they simplified the tax code, and reduced the size of government and government spending, income inequality would be lessened. If you look at America in the 1900s, government made up about 3-4% of GDP, and the middle class relatively was much more affluent and enjoyed a standard of living like no one else in the world. What made Americans wealthy, was they were more productive. Instead of using their hands to dig, they got a shovel, then a bulldozer and these tools or "capital" allowed Americans to produce more in less time which increased their income. Our president believes that the economy grows from the middle class outward, or from the ground up. It doesn't. It trickles down, because it savings and investment that fund capital expenditures which enhance productivity. Every nation has workers, but not every nation has the necessary capital investment to make those workers more productive.

Posted by: John Stephens | Apr 23, 2012 8:50:26 AM