The pundit class has spilled a lot of pixels about the so-called rich-poor “gap.” They spilled even more when the pup-tents started popping up in Zuccotti Park. But almost all of these gap-minders have failed to address the fact that there are two kinds of inequality. One kind matters and one doesn’t.
The inequality that matters is the kind that is the result of bad policies. These policies transfer resources from the poor and middle class to the rich — shrinking the economic pie. The great political scientist Mancur Olson called this “concentrated benefits, diffuse costs,” but most people call it crony capitalism. Great civilizations fall when rulers reward Takers at the expense of Makers.
Reducing the inequality that matters
You know that phonograph with the scratch right at the phrase “tax the rich”? Our “ten things” are a little different from that old song.
1. End corporate welfare: Bank bailouts. Agribusiness subsidies. Pork. You name it. Politicians are doling out corporate welfare at every level of government. (Think Solyndra.) One way to reduce inequality is to stop transferring wealth from taxpayers to Takers.
2. Roll back regulation: Excessive regulation makes goods and services more expensive for everyone and raises the costs of starting a small business. The big businesses love it because they can afford the regulations and they know that the regulations will keep out smaller competitors. Such policies deny poor people opportunities. Regulations are regressive. Let’s roll them back.
3. Close loopholes, flatten taxes: Our complicated tax code is designed so that it is easier for wealthier people to purchase the energies of CPAs who find loopholes. For the poor and middle class, tax lawyers may not be worth a nickel. Let’s flatten taxes and close loopholes. How about a 15% flat income tax and a 15% flat corporate tax? Let’s stop enriching IRS bureaucrats and H&R Block executives and start enriching all the people who serve customers better.
4. Raze America’s pyramids: Local boondoggles like light rail and sports arenas mean higher sales taxes. That burden falls disproportionately on the poor who pay for local sales tax increases whether or not they patronize the stadiums, visit the convention centers or ride the light-rail lines. States should forbid developers and sports owners from bilking municipal taxpayers. (Bureaucrats argue these boondoggles improve the local economy and ultimately benefit the poor. But they’re wrong.)
5. Means-test Medicare: Why should struggling young people have to fund the healthcare expenses of rich seniors in Boca Raton? Medicare requires just such transfers. We can start by means-testing Medicare or abolishing it altogether. Elderly people who cannot afford basic healthcare can get Medicaid — or better, a voucherized version of Medicaid.
6. Delink Cadillac care: Duke Law Professors Clark Havighurst and Barack Richman write that: “[T]he U.S. health care system operates more like a robber baron than like Robin Hood, burdening ordinary payers of health insurance premiums disproportionately for the benefit of industry interests and higher-income consumer-taxpayers.” So people with good jobs get tax-protected insurance while the working poor have to fend for themselves on the individual market. That’s crazy. We need to delink employment and health insurance.
7. Starve the bureaucrats: Iain Murray in his excellent book Stealing You Blind writes: “‘We are spending more on [insert name of program]’ is a badge of honor for any bureaucrat or politician. Yet it’s actually a sign of failure. Spending more to help more is not a sign that the program is working, it is a sign that it is failing to address the ill it is meant to cure, whether that be poverty, obesity, insert your cause here.” We’ve got to starve ineffective bureaucracies by applying cost-benefit analyses and tying them to budgets and/or by implementing a Taxpayer Bill of Rights.
8. Stop state-level arms races: “Economic incentives” are designed to attract existing companies from this state or that. But they are just another form of corporate welfare. Politicians think they should lure companies from other states with your tax dollars, but this process is self-destructive — particularly as some of these companies are insolvent. We should demand states abandon the incentives arms race, for it is the worst form of “trickle down” economics.
9. Minimize minimum wages: The minimum wage is an idea born out of good intentions. But the unintended consequences can be devastating. Every time Congress raises the minimum wage, it raises the costs of hiring new employees. That removes the bottom rungs of the economic ladder for many — especially black teenagers. We should abolish the minimum wage or at least cut it in half.
10. Bust state-supported unions: Unions — public and private — are labor cartels that artificially raise labor costs. The perverse effect is that workers who aren’t unionized have higher barriers to entry. Unions use government power to enrich themselves and use forced union dues to fund political campaigns. They transfer resources from taxpayers and deny opportunities to folks who would otherwise work at market wages. We need to remove state crutches from private unions and abolish public-sector unions outright.
The inequality that doesn’t matter
Some inequality emerges naturally from entrepreneurs and investors growing the economy. Those who work hard and make good decisions enlarge the economic pie for everyone. These aren’t the same as corporate raiders who lobby politicians for a slice of the pie. People like Ray Brescia, who would redistribute wealth from real entrepreneurs, are motivated by envy, guilt or indignation.
If we’re genuinely concerned about the poor, we’ll return to an economy that rewards the Makers and punishes the Takers, Gini Index be damned.
Max Borders is a 2011-12 Robert Novak Fellow. He’s writing a book on wealth inequality.