Income inequality is not the problem.

Income inequality is not a problem in and of itself.  As long a people earn their income through honest, peaceful and voluntary exchange, then there is no moral reason for our government to redistribute that wealth.  What is a problem is when government places its thumb on the scale and unfairly helps the rich to get richer, or hurts the poor and makes them poorer.  To the extent that a person gains wealth by unequal preferential treatment by government, it is morally correct for government to use its force to take away that wealth.

One good example of the many unfair government policies that wrongly favor the rich is the special low income tax rate on “carried interest” income earned by hedge fund managers.  They call it carried interest, but it is nothing more than a bonus based on performance.   In any other situation, this type of income is taxed at regular income tax rates. Somehow, hedge fund managers have sold politicians on the idea that carried interest is a special kind of income that should be taxed at lower rates.  Another example is the Oil Depletion Allowance for oil companies.  Another is farm subsidies for rich farmers.  We do not need to raise tax rates on ordinary income, we do need to do away with the unfair preferences, tax breaks, and subsidies that go mostly to the wealthy.

A good example of government policy that hurts poor people is that of keeping interest rates low in order to prop up housing prices.  If housing prices had been allowed to fall to their free market levels, housing would be much more affordable for poor people.  Instead, our government tries to fix the problem that it helped to create (unaffordable housing) by giving rent subsidies to the poor – creating more dependency on government, but not fixing the underlying causes of the problem.

To misquote Walter Scott, “Oh what a tangled web we weave when first we practice to use our government to achieve social goals.”  The solution to many of our economic problems today is to reduce the size and scope of our government.  Many unfair crony capitalist subsidies and tax breaks exist because our government has expanded far beyond its Constitutionally limited powers.  The primary just powers of government are to protect our lives, liberty and property; and to resolve disputes.  The scope and powers of our current federal government are clearly way beyond the limited government that our founding fathers created.  Lets start by closing unfair tax breaks and lowering spending to match.

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2 thoughts on “Income inequality is not the problem.

  1. Thanks Kurt. Income inequality is an “issue” that didn’t much interest me (or at least I have always been wary of the mechanisms that would need to be used to decrease it) until I started to notice the many ways that the super rich and corporations use their tremendous wealth to manipulate government policies, make an uneven playing field, and rig the system. This works against the free market. Still, it’s a tough problem to solve–especially with big money gumming up the works along the way. Knocking down incomes across the board doesn’t seem very fair either.

  2. I agree. Unless the inequality is caused by government, income inequality is a feature of a free society, not a problem. To make people understand what I mean I try to explain how terrible “Income EQUALITY” would be. Imagine living in a society where there is no incentive to work harder than everyone else. How many would rise up and risk it all to create the businesses that provide us with the products that we use every day?

    I wrote an article recently entitled “Be Thankful for Income Inequality.” For anyone interested, it can be found here: http://www.truthinexile.com/income-inequality-is-good/

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