Inequality Is Not the Issue

by Veronique de Rugy

The New York Times’ Room for Debate blog ran an obligatory discussion about whether reducing the deficit will increase inequality between the rich and the poor. Of course, by increasing inequality the New York Times didn’t mean asking the rich to shoulder even more of the total burden than they do now. Still, the debate is well worth reading, particularly because several of the debate participants make the case that income inequality is the wrong focus for government policy.

For instance, here is Tyler Cowen:

When it comes to fiscal policy, we would be ill-advised to focus too much on the inequality issue. The key questions are getting educational and health care systems which work. Well-functioning institutions will remedy a lot of bad inequality so how we spend the money becomes the question of central importance, not how we pay for what we spend.

And here is Andrew Caplin of the Center for Experimental Social Science at New York University:

For anyone with a healthy ethical sense, income inequality is disturbing, as is its recent and continuing growth. Yet this does not mean that it should be the primary focus in discussions of the deficit. To make it such introduces some real hazards.

Caplin makes the point that “a focus on income distribution runs the danger of simply being a political pose. Actual policy effects on inequality are very hard to understand.” He also mentions the greater inequality that often gets missed in these discussions: generational inequality.

Finally, Mike Tanner of the Cato Institute writes the following:

Income inequality is the wrong focus for government policy. After all, if we doubled the income of every American tomorrow, inequality would actually increase — but we would also lift a lot of Americans out of poverty.

A more expensive government is a burden that will ultimately reduce growth and make it harder for the poor to move up the income ladder. In the context of deficit reduction, that means we should keep this goal in mind: not punishing the rich, but reducing poverty.

But the deficit commission has a different view:

Maintain or increase progressivity of the tax code. Though reducing the deficit will require shared sacrifice, those of us who are best off will need to contribute the most. Tax reform must continue to protect those who are most vulnerable, and eliminate tax loopholes favoring those who need help least.

While the goal of protecting the most vulnerable people in our society is a good one, it shouldn’t be done by increasing the burden on those who are already paying the most by far. Actually, now that I think about it, inequality is the issue. It’s time that the cost of government stops falling systematically and more than unequally on top income earners.