Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 6 The Economics of Labor Markets
Chapter 20 of 36 Income Inequality and Poverty
Section 20 of 20
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The ancient Greek philosopher Plato postulated in an ideal society the income of the richest person would be no more than four times the income of the poorest person.
Our society has much more inequality than Plato recommended.
One of the Ten Principles of Economics: governments can sometimes improve market outcomes.
There is little consensus about how this principle should be applied to income distribution.
Philosophers and policymakers of today do not agree on how much income inequality is desirable or even whether a goal of public policy should be to alter income distribution.
Whenever taxes are raised lawmakers argue about tax progressivity, how much if any the percent tax rate should go up as income increases.
Another of the Ten Principles of Economics: people face trade-offs.
Policies that penalize the successful and reward the unsuccessful reduce the total amount of wealth generated and incentives to succeed.
Policymakers face a trade-off between economic efficiency and equality.
One result of income distribution about which almost all economists agree: the more equally the pie is divided, the smaller the pie becomes.
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Why not implement a tax and wealth distribution system limiting top-bottom income differences to 10%?
Grok:
The proposal for a system where taxes and redistribution ensure no more than a 10% difference in incomes (e.g., post-tax incomes ranging from, say, $90,000 to $110,000 for all adults in a hypothetical economy) represents an extreme form of egalitarianism.
While it could theoretically reduce inequality, promote social cohesion, and address issues like poverty or excessive wealth concentration, economic theory and evidence highlight significant drawbacks that make it impractical and potentially harmful.
Here is an outline of the key arguments against it, drawing from economic analyses:
1. Disincentives for Effort, Innovation, and Entrepreneurship
A narrow income band would erode motivations for high productivity, risk-taking, or skill development, as rewards for exceptional performance diminish.
Economists argue this stifles innovation and economic growth, as individuals and firms prioritize compliance over ambition.
For instance, top talent might reduce effort or emigrate (brain drain), leading to lower overall output—similar to how high marginal taxes in the mid-20th century prompted tax avoidance or relocation to other countries.
Historical parallels: Attempts at wage compression in socialist economies (e.g., Soviet Union) resulted in low productivity and black markets, as workers lacked incentives.
2. Market Distortions and Inefficiencies
Imposing such rigid caps interferes with free market dynamics, where wages reflect supply, demand, and value creation.
This could cause labor shortages in high-skill sectors, reduced investment (as capital owners see diminished returns), and firm downsizing or relocation to other countries avoid restrictions.
In a global economy, domestic caps would disadvantage local businesses, eroding competitiveness against uncapped international rivals.
3. Administrative and Enforcement Challenges
Defining and measuring "income" (e.g., including perks, capital gains, or offshore assets?) would require massive bureaucracy, with high costs and loopholes for evasion (e.g., deferred compensation or non-monetary benefits).
Enforcement could foster corruption or underground economies, as seen in past wage controls.
4. Unintended Social and Economic Consequences
While aimed at equality, it might exacerbate poverty if growth slows, reducing the total pie to distribute.
Wealthy individuals could lobby against or undermine the system, leading to political instability.
Alternatives like progressive taxation without rigid caps achieve redistribution with fewer distortions, generating revenue for public goods.
In summary, while extreme redistribution appeals to equity goals, it creates economic stagnation, talent loss, and inefficiency.
Moderate policies (e.g., progressive taxation, higher minimum wages, wealth taxes) are often favored as balanced approaches.
If the 10% income difference idea was implemented, it could mirror failed experiments in hyper-egalitarianism, with greatly reduced total economic wealth and prosperity.
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wealth and prosperity
tomi to hanei
富と繁栄
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(end of chapter 20 of 36)
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Congratulations! 56%, 20 of 36 chapters, of way to becoming competent economist.
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