Inequality Bad – Taxation Worse

I’ve been anxiously awaiting Megan McArdle to write a response to
Paul Krugman’s screed on inequality of income in America
and sure enough she has a detailed and well written response.

The thing about this Krugman piece that made me hold off on writing my own response was that there are parts of it I agree with. CEO compensation is out of control, and rarely is it tied to actual performance. There is rising inequality of income in America today, although it can easily be argued that this isn’t nearly as bad a thing as Krugman believes it to be.

While some of Krugman’s assertions are true, his solutions would only make ths situation worse. As McArdle points out, raising the tax rates for the top brackets doesn’t just hurt the super-rich. It also takes with it the people who have been successful at what they do and because of it have earned a lot of money. Someone who makes $300,000 as a surgeon isn’t super rich. Yes, they’re well off, but you can’t tell me that someone who grew up as the son or daughter of a farmer and worked their way through medical school on the sweat of their backs somehow is morally wrong for making that much money. While it’s easy to say that all rich people get their incomes from inheritance or investments, it’s simply not true.

Nor is it true that the members of the upper income brackets are living high on the hog. If you’re pulling down a quarter of a million a year, that doesn’t mean that increased costs aren’t going to hurt. If you have a kid in college you’re even worse off as you’re too "rich" to qualify for a lot of financial aid but the cost of college would still put a sizeable dent in your income, especially as college tuition prices go through the roof.

It’s easy to say that we should soak the rich, but the super-rich have the resources to put their cash into various shelters. Those who are productive and successful don’t have the money to pay off financial advisors and are the ones who would end up bearing the brunt of the increases. These are not the people we want to be publishing as they’re the bedrock of the economy.

The best way to reduce inequality is to remove barriers to entreprenuerial activity by decreasing regultion, lowering taxes that punish investment, and allow for a system in which the wealthy feel safer putting more money into the economy and not into tax shelters. Just don’t expect Paul Krugman to advocate any of those solutions.

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