A Little Math Game: Income Inequality

Some of us routinely, habitually, compulsively do a little math when economic proposals are made. It seems most people, however, are uninterested or incapable of such activities, proving, if we needed proof, that our schools are performing exactly as designed.*

Here we address just the math & economics side of ‘income inequality’.The real issue is philosophic and moral, but that deserves a longer exposition and will have to wait until another day. For now, I note that there are some slippery concepts behind ‘income inequality’, going under the terms ‘fair’ and ‘justice’, that refuse to be defined, or, often, refuse to stick to one definition and play the logic out to the end. Of course, people of good will want everybody to be happy; of course it necessary to have some level of stuff to be happy for all but the most ascetic saints. But it’s a much different argument to say that my not having something somebody else does have – more income, for example – is, in and of itself, a cause of unhappiness, or ‘unfair’ or ‘injustice’. If it were, then my being shorter or less good at math or less physically attractive or female or black or old or just about anything could be seen as unfair or unjust – and we can see where that road leads.

No, while it is certainly the case that those who have much *may* be guilty of greed and pride, it is certainly the case that those who are unhappy merely because somebody has more than they do are guilty of envy. If one has enough food, a safe place to sleep, decent clothes, and enough security to enjoy the fellowship of family and friends, one has enough to be as happy as life in this world allows. The greatest unhappiness I’ve personally come across in my life is sometimes accompanied by poverty, which, in the country, mostly means insecurity – financial, physical – not lack of stuff, but is always accompanied by broken relationships. Maybe we need to love each other first, get to know each other, be there for each other, rather than worrying about who drives a Mercedes and who takes the bus?

Enough. Let’s take a brief look at the economics:

Any money that is used to address income inequality comes from someplace. The most popular idea is to take it from ‘the rich’, which, in practical terms, is defined as ‘anybody who has more money than I do’. ** For this exercise, however, we’ll look at corporate profits – a pretty good stand in, since most of the wealth of the truly wealthy comes from owning businesses.

So, for fun – what if we had a billion dollars with which to address ‘income inequality’? If we focused on the U.S., that would come to a little over $3 per person: $1,000,000,000 / 318,000,000 = $3.15. But, clearly, the people at the top don’t need the extra 3 buck. If we aimed to lift up only the bottom half of the country, we could give a whole $6.30 to each man, woman and child in economic bottom half (however that is defined).

But wait – that’s not what we mean! We want to give everybody in the lower half some real help here, not the price of a short latte and cookie. What about all those corporate profits?

in 2013, corporate profits in the US came to $1.68 trillion. If we gave all of those profits to each person in the bottom half of the US in terms of income, we’d give them each $10,584.

Not bad. A family of 4 in the lower half of income would be up $42K – at least until the wage earners got laid off.

Let’s say you have a retirement fund or 401(k) – even some people in the lower half of income have those. Well, the managers of those retirement and 401(k) funds will all pull their money out of the US economy as fast as they possibly can – and you, the fund beneficiary, would fire them if they didn’t – because the value of their US company holdings would promptly crater, and the value of your retirement fund and 401(k) would promptly approach zero insofar as they are made up of stocks and bonds in companies that don’t make money. Nobody wants to own a company with no profits and no prospects of profits in the future.

OK, too extreme. Let’s say instead, that we seize only another 10% of corporate profits (the government currently takes about 22% in taxes; raising the corporate tax rate to about 30% achieves this). Now we’re able to redirect $168 billion to the bottom 50% – $1,058 per man, woman and child. Not bad, but not earth-shakingly good, either – you can burn a grand so easily now days, it’s unlikely to change your life except briefly and marginally. But, hey – wealth inequality has been reduced.

Tax burden expressed symbolically

Two consequences of this move. First, investment dollars (your 401(k), for example) will move away from the more highly taxed, and therefore less profitable, companies toward instruments (fancy word for things you can invest in) that look to have better returns. One thing this means is that it will become more expensive for those companies to raise money for ongoing operations and new projects (that might employ more people). So – and this part seem really hard for people to grasp for some reasons – economic activity, part of which is paying workers, will tend strongly to decrease.

Think of it as hiking up a hill: everything that weighs anything that I have to carry up the hill slows me down and tends to take the fun out of it and discourages me from even trying. If I like hiking, I might do it anyway even if I have to carry a brick with me; if I have to carry a couple cinder blocks, I might reduce the number or length of the trips, or give up entirely. And carrying anything heavy will slow me down regardless of how I feel about it.

So, say we really want a DMV office on the top of that hill, and believe businesses should carry the bricks and cinder blocks up for us, since they are going that way anyway.  And the businesses might agree, even. But, eventually, it gets old – especially if the people making the demands don’t even know what it’s like to carry blocks up a hill.

Analogy strained beyond its carrying capacity.

Second, and here’s another thing where the common understanding is curiously baffling, businesses will look for ways of doing business that generate fewer taxable dollars.  This gets called ‘tax evasion’ even when it is a perfectly reasonable and legal response to a disincentive. Just like you or me, if we’re deciding between two options and one is cheaper to us than the other, businesses will give a hard look at seeing if they can get by doing stuff that costs them less. For example, at $1 a gallon for gas, I might like the Prius but not get it; but a $4 a gallon (and thousands of dollars in tax breaks and incentives) it looks a lot better. If I choose a Prius under those conditions, am I guilty of tax evasion, since I’m paying much less gas tax than if I bought the Land Rover?

Thus, the people I work for invest in creating leasing companies, because the tax laws favor owning equipment over other types of investments. Is it good that a company whose bread and butter is insurance or tech hardware would want to get into finance instead of investing in what they are already good at? I don’t know, but I do know that taxes are a major driver in this decision.**

The net result of all this is that taxable corporate profits will be less than they would have been had the tax rate not been raised, just like taxable corporate profits are reduced when you buy a Prius (you didn’t know that’s how it works? Somebody somewhere is paying for those subsidies – and trying to figure out a way to reduce their bill.). Profits may still be good; they may still even go up – but they will be less, as companies continue their endless battles to control costs. Taxes are a cost

OK, so our hypothetical family of 4 gets an additional $4,200 per year, based on taking 10% of 2013 total corporate profits and redistributing it to the bottom half of people, however determined. Corporations will give even more attention to seeing how they could reduce expenses.

It just so happens that one of the top expense for most corporations is people. So, by reducing profits through taxation, we would reduce, among other things, the ability of corporations to hire and pay people. Now, we can pout about this, or even convince ourselves that it’s WRONG for corporations to, for example, lay people off when faced with reduced profits – we may even try to enact laws to make it hard to lay people off (we already have – Europe has gone much farther, which is why they have much higher and more permanent unemployment that we do).

But the real price, the one almost universally ignored, is the drag on people who might otherwise want to start or expand their businesses – little companies and big. If you make it harder to pay people or to fire them, you discourage hiring by the guys tinkering in the garage, the dudes mowing lawns and cleaning office buildings, the plumber and car repair people, as well as the Walmarts and the GEs.

They don’t behave like this because they’re evil – business people are no more or less evil than anybody else, in my experience – but because they do the math.

* The only mystery: how did any of us sneak through without hating math? No doubt efforts are underway to fix that systemic flaw – any new educational proposals out there that would dull our minds and crush initiative? That’s what I’m talking about.

** One of the ideas I’ve tried to beat to death here on this blog is the notions that the rich are people with high incomes. Nope – if you are relying on income for your daily needs, you’re a piker. If you need an example, look at your typical professional athlete or lottery winner – huge amounts of income, often, but more often than not, they are broke again within a few years. Meanwhile, how many generations of Rockefellers and Carnegies are still living in big houses at the ends of long drives, more than a century after their forebears assembled their original fortunes? Nope, wealth is owning stuff that produces money. It takes a lot of income and steely resolve to reach that point for us working stiffs. It can be done – it just isn’t, for the most part.

*** This is what is meant by market distortion: instead of people doing business based on what other people want to pay for, they do business in such a way as to best avoid or take advantage of government policies. This could be good, or it could be bad – but it is inevitable once pressure (taxes, regulations, whatever) are applied to buying, selling and making stuff.  What I’m primarily against is pretending it doesn’t happen – or that we understand in advance exactly how it will shake out.  Unintended consequences and all that.




Author: Joseph Moore

Enough with the smarty-pants Dante quote. Just some opinionated blogger dude.

2 thoughts on “A Little Math Game: Income Inequality”

  1. “The only mystery: how did any of us sneak through without hating math?”

    Some people just enjoy math. They generally fall in line with the dogmas of naturalism easiest of all, so it’s tolerated.

    Philosophy, on the other hand…

    1. True.

      Plato, at his academy, used math as a sort of shibboleth – only those with the talent and perseverance to learn math were considered fit to govern.

      Somehow, I don’t think we’ve improved on that idea…

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