Income inequality is a narrative often pushed by those who wish to implement socialist agendas. The idea might seem noble at first, but it is a mistake to judge policymaking by its intentions rather than its outcomes.
In the case of reducing income inequality, we must judge the outcome, not the intention. The intention behind such policy is to reduce the gap between the rich and poor. However, the outcome of such attempts not only increases the gap, but reduces wealth across the board.
When the attitude of policymaking is to reduce income inequality, the policymakers will seemingly stop at nothing until they reach their desired goal (whatever that may be). As the gap increases between the rich and poor, they continue to call for more taxation and regulation to reduce the gap. But always to no avail.
Two of the most common policies implemented to reduce the gap are the progressive income tax, and raising of the minimum wage. Both present serious problems that affect the poor and middle classes more than they affect the rich.
First, the progressive income tax is probably one of the most detrimental economic policies the 20th century brought to the world. The idea behind it is to gradually increase tax rates as incomes increase. For example, at $40,000 the income tax rate may be at 10%. At $65,000, it would jump to 14%. At $100,000 it would jump to 20% etc.
This kind of policy hurts the middle class because one may be less inclined to seek a higher paying job if they would be moved into a higher tax bracket, thus bringing home less pay than before. When the progressive income tax does not reduce income inequality, policymakers will call for another increase in taxes across the board. How does that help anyone?
Not to mention that this increases the complexity of the tax code, further frustrating a populace and disincentivizing enterprise.
Second, the minimum wage is often used as a political football. If we just raise the minimum wage, income inequality will be reduced (they said).
In actuality, this doesn’t happen. Increasing the minimum wage only prices people out of the jobs market, especially high school and college students. Maybe a job is only worth $7.50 an hour to an employer. If the minimum wage is $12, an employer is inclined to simply have someone who already makes more than the minimum wage do that particular job; thus increasing the workload for other employees.
Perhaps an employer cannot afford a $12 minimum wage, so he/she decides to lay off some workers or not expand the business. Those are lost jobs and capital for lower income people.
Neither the progressive tax rate nor hikes in the minimum wage work. Instead of being concerned about such things, you should consider this: median wage. Rather than focusing on the lowest wage, focus on raising the wage for everyone, not just the low income bracket. So what if your boss makes $5 million a year? If you’re making $200,000 are you going to complain about what he’s making, or are you going to work hard enough to make $5 million a year for yourself?
The difference in incomes is not the most important factor in a prosperous economy. Just as previously stated, if you can make $200,000 while your boss makes $5 million, why would you trade that for making, let’s say, $50,000 while your boss now makes $500,000.
Sure the income inequality is a lot less now, but both are making less money than before, and the rest of the economy will take a hit as those dollars are being spent by government “solutions” rather than private transactions.
The words of President Calvin Coolidge ring true to this day.
In short, government control of the economy is not the answer. Prosperity is impossible to achieve when policy discourages entrepreneurship, takes from those who have, and attempts to give it to those who have not.
Originally published on my LinkedIn profile.