Piketty's Cure for Income Inequality Hurts the Poor

Click here to read the article. It is by Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. Excerpts: 

"Two eminent economics professors, Carnegie Mellon’s Allan Meltzer and the Wharton School’s Scott Richard, are challenging his conclusions with a new model and different data. Contrary to popular wisdom, they find that government redistribution increases inequality rather than reducing it."

"using redistribution to ameliorate income inequality is not only ineffective, but worsens the problem that policy makers seek to cure."

"technological progress happens through “learning by doing.” Since workers’ productivity levels increase with the more they produce, and because higher taxes create disincentives to working, taxes lead to lower economic growth."

"people act to maximize their lifetime utility and that the “median-voter theorem” holds. That means the median-income earner chooses the tax rate, so the tax rate selected will likely be higher than the rate chosen by those with income above the median.

Higher tax rates that fund transfer payments hamper economic growth."

"There also is less learning-by-doing among those who work. This has been extensively documented by University of Chicago professor Casey Mulligan in his award-winning book, “The Redistribution Recession.” As taxes and transfers rise, hours of work and acquired skills decline, reducing economic growth."

"this decline in hours worked for low-productivity workers that leads to more economic inequality — not the growth of technology nor the rent-seeking privileges of the rich"

"Reduced effort by the rich in reaction to higher taxes comes at the expense of economic growth, which has the potential to raise everyone’s living standards and increase economic opportunity."

For developing economies, such as India and China, the rate of economic growth increases quickly, because they can copy technology from mature economies. The result is a high rate of economic growth that slows over time, as promising technologies are integrated. As the growth rate of the economy slows, the rate of government growth increases due to a slowing of the “learning by doing” mechanism. This larger government, as measured by a higher tax rate, leads to more income inequality.

"the growth of government is the true driver behind inequality."

"Their model predicts that the rate of productivity growth (the “learning by doing” mechanism) grew over time, until declining post-2007. Comparing their estimates of productivity, tax rates and income inequality, they find their estimates closely match what actually happened."

In the discussions of income inequality that have become so popular today, the government’s power to redistribute tax revenue is frequently touted as being a tool to narrow the income gap between the rich and the poor. Meltzer and Richard show that even though higher taxation may lead to less inequality in terms of consumption, it eventually leads to higher levels of inequality in terms of income. That is an important result that cannot be ignored.""