Bryan Caplan on Income Inequality
By David Henderson
The Power of Partial Derivatives
Bryan Caplan’s reasoning on income inequality is correct. Some of the commenters who think they disagree are pointing to the fact that rich people are often honored and praised. That’s correct. They often are. That doesn’t at all take away from Byran’s point. Take whatever level of honor, praise, and deference the top 1% get–and then add scorn and attacks. The net effect of adding scorn and attacks is to shift to the left the supply curve of those aspiring to be in the top 1%. Net result: the per person income of the people remaining rises.
The only way to challenge Bryan’s argument is to challenge the view that scorn and attacks shift the supply curve to the left. Scorn and attacks would have no effect only if people were completely immune to those attacks; scorn and attacks would reduce their incomes only if people who aspire to be in the top 1% enjoy those attacks or, at least, use them as motivators. My strong gut feel is that Bryan is right about the direction of the effect on the supply curve.
I made a related point here:
[I]ncreasing marginal tax rates would increase measured inequality as long as the supply curve of high income earning labor is even slightly upward-sloping. The reason is that an increase in the marginal tax rate would discourage work. This reduction in the supply of labor would drive up the before-tax pay of the highest earners. All other things equal, their after-tax pay would decrease and after-tax inequality would fall — but measured inequality would rise. One can easily imagine advocates of such a policy promoting even higher marginal tax rates on high earners on the grounds of “we didn’t increase taxes enough to have an effect.” Of course, the ironic result would be a further increase in measured inequality.
In the 1970s, when oil companies with large inventories of crude oil were being lambasted because of their record profits (funny how that happens when your inventory suddenly gains value due to a sudden increase in its price), politicians excoriated oil-company officials, hauling them before Congress to explain themselves. In various speeches I gave in the 1970s, I pointed out that to the extent this had any effect, it would be to increase the profit rates of oil companies.