Cato on Income Inequality

Contrary to Popular Belief: Cato and Reason weigh in

This section covers the main proponents that Saez and Krugman were not totally correct.

The effect of the change from manufacturing age (1940's to 1960's) to a information/technology age (1980's to present) put a large emphasis on skills and education, and therefore changed the income dynamics as well as overall growth.

Labor unions kept focusing on manufacturing and not the shift to skill acquisition, both within certain segments of the economy and in education.

Liberal media and pundits are more concerned with the rich and the shift of income increase, while the middle class with education did quite well.

Kurt Vonnegut's "Handicap General" is ready and waiting.

One should understand the problem before seeing if intervention is required.

Cato (Tanner): Link

As we listen to President Obama, Occupy Wall Street, and much of the mainstream media working themselves into a lather over inequality in America, one thinks of Harrison Bergeron, the 1961 short story by Kurt Vonnegut that posited a society based on perfect equality, "not only equal before God and the law ... equal every which way."

The government employed a "Handicapper General" to ensure that no one was smarter, more athletic, or more productive than anyone else.

Beautiful people were forced to wear masks, athletic people had to carry weights, and intelligent people wore radios in their ears to interrupt their thoughts with loud noises.

Most studies of inequality, including the recent widely reported study by the Congressional Budget Office, rely on IRS-reported taxable income. But, as studies by the Cato Institute's Alan Reynolds and others show, reports of skyrocketing incomes among the top 1 percent of earners may be distorted by changes in the tax code that have resulted in more wealth being reported as taxable income.

These tax changes caused businesses to switch from filing under the corporate tax system to filing as individuals, and executives to switch from accepting stock options taxed as capital gains to nonqualified stock options taxed as salaries.

Simultaneously, the reductions in income-tax rates in 1986 caused much previously unreported income to show up on tax returns.

At the same time, incomes among lower- and middle-income workers have been shifting from cash wages to non-cash benefits such as health insurance and pensions. These non-cash benefits frequently do not show up as taxable income even though they have value to the worker. In fact, a recent study by Mark Warshawsky of the Social Security Advisory Board suggests that nearly all of the recent increase in earnings inequality

"can be explained by the rapid increase in the cost of health insurance employee benefits, and that therefore [there] has not been as significant increase, if any, in inequality of compensation."

Similarly, many studies looking at low-income Americans fail to account for non-cash social-welfare benefits such as food stamps, housing subsidies, and Medicaid. Fully accounting for all of these factors suggests that the gap between rich and poor may not be nearly as large as thought, and that inequality may not be growing at all.

Studies also show that what inequality does exist is not the result of the Bush tax cuts or a failure to spend more on social-welfare programs,

but on the transformation of the American economy from a focus on manufacturing to information and technology.

This change puts a greater premium on education. As a result, the incomes of high-school dropouts or those with just high-school degrees have stagnated while incomes for many college graduates and those with graduate-level educations have increased significantly. The unfortunate fact is that despite massive increases in education spending, large segments of our society remain unprepared for a 21st-century economy. That is a tragedy, but it has nothing to do with tax cuts for the rich.

But as Nobel Prize–winning economist Gary Becker pointed out, "It would be hard to motivate most people if everyone had the same earnings, status, prestige, and other rewards."

Another Nobel Prize winner, F. A. Hayek, concluded, "The rapid economic advance that we have come to expect seems to be in large measure a result of this inequality and to be impossible without it. Progress at such a fast rate cannot take place on a uniform front but must take place in an echelon fashion, with some far in front of the rest."