The debate over “income inequality” has simmered for some time, but now seems to be upfront as a key dividing line in American politics. President Obama uses the concept to make his case for raising the federal minimum wage. And, the Oregon Department of Employment reports on the so-called growing wage gap between rich and poor in our in state as though that were our primary economic problem.

But many who see income inequality as a major problem tend to have a fuzzy understanding of how our economy works―and who is to blame for our economic problems. They seem to think capitalism is evil. They seem to think “rich people” are evil, and they assume rich people gained their wealth by stealing money from the rest of us.

But that’s wrong. Most rich people got that way because they operate in our free-market system to provide goods or services that the rest of us willingly purchase. They create value for us, and for themselves.

Take, for example, the late Steve Jobs of Apple Computers. Jobs died in 2011 at the age of 56. From starting Apple in his garage back in 1976, he accumulated some $8 billion by creating and selling a number of very innovative products to millions of people. From desktop computers, to iPods, to iPhones, and now iPad tablets, Jobs made many lives easier and more enjoyable, and made many of us more productive. For that, those of us who freely purchased his products rewarded him with great wealth. He didn’t steal money from his customers. No one was forced to buy Apple products.

And yet, many people seem to believe that somehow Jobs and other rich people did just that: stole money from them. They think rich people get rich by making other people poor. What they fail to recognize is that poverty is not created. It’s the default condition of mankind. It’s wealth that has to be created.

People like Steve Jobs, Bill Gates of Microsoft, and Sam Walton of Walmart created fabulous amounts of wealth by meeting the needs of the rest of us. We gladly buy their products because they make us better off, not because there is some government mandate that we do so.

But, President Obama either doesn’t understand that or chooses to ignore it. In 2010 he told us that he thinks at a certain point “you’ve made enough money,” meaning that after that point you should pay more taxes than other people.

However, rich people are, if anything, already paying more than their fair share. In the year the President made that statement, the top one percent of tax returns included 18.87 percent of all adjusted gross income and 37.38 percent of all federal individual income taxes paid. The top 5 percent earned 33.78 percent of income and paid 59.07 percent of taxes. The top 10 percent earned 45.17 percent of income and paid 70.62 percent of taxes. How much more should they pay to make everything “fair?”

Billionaire Warren Buffet says that, because much of his income is in the form of capital gains, he pays a lower tax rate than his secretary. Those who seem to envy the rich are demanding he pay at least as much as his secretary. They want to raise his tax rate up to hers.

But I suggest instead that we might want to lower her rate, and ours, down to Buffet’s. I think most of us would prefer to have our taxes lowered, rather than increase taxes on the few billionaires among us. That would help make most of us better off, rather than making the rich few worse off.

And, even if income inequality were a bad thing, a strong case can be made that government solutions may make the inequality worse. As recently noted by the non-partisan Congressional Budget Office, President Obama’s proposed $10.10 minimum wage, if applied across the economy, likely would reduce total employment by some 500,000 jobs. This is another acknowledgement that raising wages above what relatively unskilled workers are worth to a business is likely to lead to some of those workers either not being hired, or actually losing jobs they already had at the bottom of the economic ladder. Raising the minimum wage simply chops off some of those lower rungs on the ladder.

Whether or not income inequality is fair, finding ways to reduce it by helping low-income earners improve their skills and qualify for more demanding positions would be a good idea. However, reducing it by pounding down the top earners through higher taxes will not help low-income earners; it will actually make them worse off.

Steve Buckstein is Founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

21 thoughts on “Income Inequality: A Problem That Isn’t

  1. The people getting rich off of our capitalist system use far more of the common resources and that is why they need to have a higher tax burden. I am really tired of hearing paid apologist for the wealthy demonize people who are only asking for fairness.

    1. What common resources are you referring to? And just how much higher should the tax burden of the “rich” be for you to consider it fair?

  2. For instance, the wear and tear on roads and bridges by a fleet of dump trucks and construction vehicles in 6 months is more than I could manage in a lifetime. That same construction company will add more pollution than me or my family could ever add. The amount of garbage generated that has to be housed, the amount of oil, diesel and coolant that will leak into the ground that will have to be dealt with at some point at the expense of all. When the model for our system is for companies to maximize profits by externalizing costs then there is a definite shift of burden to the individual that is not compensated for in our tax code.

    1. Generally, road wear and tear is handled by gasoline, diesel and weight mile taxes, not income taxes. Other externalities are sometimes difficult to calculate, but generally are not paid for with income taxes either.

    2. Aren’t those dump trucks being driven by employees being paid to do so, and those construction vehicles going to construction sites where employees are being paid to work construction, building houses which will pay property taxes to support schools? And don’t those paid employees support their families and pay taxes to support their communities with those jobs? All those private enterprise employees producing actual wealth, paying taxes to governments which produce nothing and mostly waste the tax money they take in. The garbage and pollutants are all pretty much an inescapable part of the human condition which needs to be managed wisely.

  3. The wealthy do not merely ‘use’ common resources. Like all of us, they pay for the use of those resources. And, using more, they pay more. And why is ‘fairness’ measured in depriving some of their earnings to a higher degree than others? If my employer receives an increase in taxes, how will his diminished cash flow benefit me or anyone else? Why is it a problem that my neighbor earns more than I, or that I earn more than my son? Is that ‘income disparity’ a problem? Who is harmed by the NBA player who is paid $20 million a year? As Mr. Buckstein rightly points out, this ‘problem’ is not a problem at all, any more than pulchritude disparity is a problem. . .

  4. Nice post, Steve. Too little attention is given to who the ‘rich’ are and what they do. In Oregon, our top .1 percent is largely made up of business owners/builders, not financiers, CEOs of Fortune 500 companies, jocks, or even tort-lawyers. You might have picked a poster child for those folks a little closer to home, Phil Knight, say.

  5. To say poverty is the default condition of mankind is lunacy. That betrays a very selfish and childlike worldview. No one is being fooled by the apologists out in force on the payrolls of the wealthy. Income inequality is fact and has real world consequences. If your trickle down corporate welfare economic theory was going to work it would have by now.

    1. If you think that the default condition of mankind is not poverty, try ameliorating it without someone, somewhere, creating wealth.

      I don’t see anyone here promoting what you call a “trickle down corporate welfare economic theory.” Indeed, I oppose corporate welfare as much as I oppose other forms of unearned income transfers.

  6. So you are in favor of doing away with the carried interest loophole? Or how about major corporations who pay NO corporate income tax? Companies like GE, Boeing, Wells Fargo and Verizon among others? This is the kind of reform people want. You make it sound like people are jealous of their neighbor with a boat. We aren’t talking about rich people we are talking about WEALTHY people and corporations who are most definitely not paying their fair share.

    1. I’m against corporate income taxes in general, because corporations don’t pay taxes, people do. Corporations simply collect the tax money primarily from their customers and employees. Government should be more honest and, if it wants to tax consumers it should do so. If it wants to tax employees it should do so. But to tax corporations is simply an easy way to duck responsibility for rising prices and/or lower employee compensation.

      1. If Steve hadn’t beaten me to it, I was going to say exactly that myself. Taxing corporations is taxation without representation. Corporations do not have a vote, even though they are supposed to be “artificial people”. If we tax them enough, we can put them out of business and then where would we be?

  7. Steve, Most tax analysts believe that owners pay most of the corporate income tax, that the portion paid by employees is probably less than 20 percent, with very little if any of it at all shifted forward to customers.

  8. Guess that pretty much sums up whose side you are on. There’s a surprise, conservative think tank guy shilling for corporations. So I take it since you don’t believe corporations should get taxed and only people should then you must be wholeheartedly against the Citizens United decision right?

  9. Buffet doesn’t think much of sharply increasing the federal minimum wage, preferring the use of the earned income tax credit instead to battle perceived income inequality.

    A major problem with the Country’s poverty data calculations is they leave out federal transfer payments to those with little or no income and also the earned income tax credit. If you earn the federal minimum wage as it currently rests, you most likely are not as bad off as income suggests because of programs assisting you either in cash or in kind.

    Also, today’s WSJ contains in article suggesting the shrinking middle class is more to do with households climbing into higher income level status, rather than households dropping into poverty. This one is kind of hard to believe but it does have some empirical foundation.

    Most economic work is not supportive of the minimum wage concept, as it takes some rather mind bending theory to make the minimum wage even a neutral proposition for total job effect. But this is largely academic, because generally the public and electorate believe in the pixie dust magic of the minimum wage. So, I think the best we can do is to allow the minimum wage to increase with the general rate of inflation, just as Oregon law currently does. Even the Eugene Register Guard is advocating against the President’s proposed jump in the minimum wage to $10.10 from less than $8 currently; preferring instead Oregon’s current minimum wage framework.

  10. I think J. Paul Getty said it best when he wrote in his autobiography that if you took all his wealth and divided it all up between those in need, in two or three years he’d have it all back again and those ‘in need’ would be no better off. It’s economic freedom the left has to curtail to insure ‘fairness’ and the curtailment of freedom is detrimental to all.

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