catallaxy files

catallaxy in technical exile

Indexing changes in inequality

with 13 comments

The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

~Adam Smith

Greg Mankiw points to this paper co-written by Robert Shiller which has the silliest idea I’ve ever read from an eminent economist. This is what Shiller proposes:

    …we argue that the tax system can improve economic welfare—even among those currently sitting at the top of the income distribution—by serving as a brake on further deterioration of the income distribution.
    Our rising-tide tax system proposal would index taxes for inequality. In its purest form, such indexation would provide today that in future years income tax rates and credits would be automatically adjusted regularly so that the percentage distribution of after-tax income remains fixed at a target level. If pre-tax inequality increases, then taxes automatically get more progressive. If inequality decreases, then the tax system automatically becomes less progressive.
    For example, if the legislation chose 2002 as the target, the proposal could be that the top 1 percent of U.S. households could not earn more than 11.4 percent of income after tax, its 2002 share, in any future year. Individuals could still rise or fall in the income distribution over time, and we can all become richer when the economy grows.The legislation would merely adopt a rule for future years that instructs the Internal Revenue Service to find a tax schedule each year that would fix the concentration of income among high-income people.

The idea is not new, it’s in Shiller’s book ‘The new financial order’. Of course, as Mankiw notes, this proposal makes perfect sense if you do care about such things and at least it keeps politicians’ discretion to engage in pork-barreling under the pretext of redistribution under some control. But it is still a very bad idea that misses the forest for the trees. If your concern is with alleviating poverty, there are better ways of doing this. This policy is fixated almost completely on an arbitrary distribution pattern. If your concern is that inequality can lead to political oligarchy, then the solution to that is to limit the power and scope of government to treat society like a chessboard in the manner described by Adam Smith in the quote at the top of this post. This can defuse competition away from seizing the levers of power and towards serving the revealed preferences of individuals in the marketplace. But that goes against the very spirit of proposals such as Shiller’s.

Written by Admin

December 8, 2006 at 8:03 pm

Posted in Uncategorized

13 Responses

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  1. Is this some sort of a wealth tax, Jason? Or am I barking completely up the wrong tree?


    December 8, 2006 at 8:35 pm

  2. No it’s worse than that. he wants the income tax rates to change very year depending on whether measured income inequality has increased or decreased.

    Jason Soon

    December 8, 2006 at 8:43 pm

  3. All the tax accountants should campaign for this guy as president.

    Jason Soon

    December 8, 2006 at 8:44 pm

  4. That’s a great piece by Adam Smith. So true.

    Shiller just wants a more elegant way to steal stuff. Personally I’d just like to white ant the entire tax system full of holes. It might not be elegant but it would still be an improvement.


    December 8, 2006 at 10:00 pm

  5. “Is this some sort of a wealth tax, Jason? ”

    Wealth taxes have been tried and they don’t raise any money.

    But its not such a bad idea to split taxes between income and assets just so long as the rates are real real low and the total government depredation is low.

    I myself am for “improving” the distribution of income so long as its not an excuse for larger government. So long as the rates are very low. And so long as people aren’t trying to change the world in some quick way.

    But this Schiller he sounds like an idiot. We already know what happened when income tax rates were high.

    Perhaps this fellow is joined at the soul with Gruen.

    Why the fixation with income for starters?

    His ideas would barely touch John Kerry and his Mrs for example.

    And does Schiller not take on board the positive revenues typically gained from dropping the high marginal rates?

    There is just no reaching some people.


    December 8, 2006 at 11:13 pm

  6. The idea of a connection between a high and unstable rate of growth in the volume of spending on the one hand…………. and “worsening” distribution of wealth and income on the other.

    Imagine if the total volume of spending in the economy is growing at 0.5% per year.

    How can rich people get a whole lot richer except by offering great benefits to the community?

    The cannot do it on land speculation. And the money in their bank accounts and the money they borrow….. well its not an easy thing to secure this money anymore. Because the price of land is likely to fall in real terms.

    A free enterprise economy with this level of stability in money is likely to improve its income and wealth distribution with every passing decades.


    December 8, 2006 at 11:19 pm

  7. I’ve heard Schiller giving a speech when he was here about 3 years ago promoting a bad book he wrote. He is really quite unimpressive. But he seemed to have caught on because he made the amazing discovery that the US stock market was due for big corrrection ……….because of reversion to the mean.

    It doesn’t surprise me he would come out with a numbskull idea like that about taxes.

    When he was here he thought the best way to ingratiate himself to the audience was to throw a bucket of shit on the GOP. Don’t worry, this was 3 years ago when they were still popular.

    Question time came and I asked him why the Yale and Harvard faculty ( he teaches at yale) all hate the GOP. He went red faced and muttered it wasn’t true. I told him his answer didn’t support the facts. I was then told to sit down.


    December 8, 2006 at 11:29 pm

  8. But it’s impossible to get a reiable measure of inequality and apply a taxing formula to meet this obsure target.

    It would all be very distortive. What would hapopen during a recession when the big earners are taking a shallacking?


    December 8, 2006 at 11:33 pm

  9. Economists’ View covered a dispute on the topic of inequality in the US – Paul Krugman calling for action to halt the slide to inequality.

    A comment noted that the gini index of inequality was on the rise from 1968. Didn’t mention that this was the time of the Great Society Welfare programs!

    I suspect that the New Deal would have had the same effect.

    Rafe Champion

    December 9, 2006 at 12:00 am

  10. “What would hapopen during a recession when the big earners are taking a shallacking?”

    Good point. But as a minor aside we don’t need to be having these recessions.

    I think we ought to get rid of them.

    Can we vote on it?

    I don’t want anymore of them and don’t see the need for them.

    Maybe one more in transition towards better money if we don’t get everything quite right.

    And then thats it.


    December 9, 2006 at 12:09 am

  11. I’m going to spit the dummy again and insult this man for not being an economist:

    Fiscal and tax policy for dummies;

    1. Balanced budgets

    2. All spending justified by a cost benefits analysis.

    3. The optimal tax is a Georgist land value tax.

    Mark Hill

    December 9, 2006 at 10:08 am

  12. If your concern is that inequality can lead to political oligarchy, then the solution to that is to limit the power and scope of government …

    I’ve always thought this line makes no sense. In a political oligarchy government will be run in the oligarchy’s interest. Both the size and nature of government will be what suits the oligarchs – why would you assume that this size and nature would coincide with either economic efficiency or with the interests of the rest of the population? History, especially South American history, suggests it certainly won’t.

    A plutocracy cannot remain a democracy in the long run.

    derrida derider

    December 10, 2006 at 8:48 pm

  13. Entrenched liberalism won’t work? What is your alternative? Tax the upwardly mobile and allow the elites to capture whatever they please with ample tax dollars?

    Mark Hill

    December 10, 2006 at 8:58 pm

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