Income inequality, taxation, and dumb ideas

When I was a graduate stuent, some people would joke about a sensationalist physics professor in Bangalore that, while his colleagues published in the Physical Review, he preferred to publish in the Deccan Herald. Similarly, I suppose the reason professors at elite U.S. universities publish stupid articles in The New York Times is that they couldn’t possibly publish such articles in a peer-reviewed journal.

Ian Ayres, a professor of law at Yale, and Aaron S. Edlin, a professor of law and of economics at the University of California, Berkeley, have written an article titled “Don’t tax the rich. Tax inequality itself”. They observe that, in 2006, the average income of the top 1% earners in the United States was 36 times greater than that of the median household, and, reasonably enough, declare that this is the limit. Literally. They write

We believe that we have reached the Brandeis tipping point. It would be bad for our democracy if 1-percenters started making 40 or 50 times as much as the median American.

How to stop this relentless climb? Easy, they say:

Enough is enough. Congress should reform our tax law to put the brakes on further inequality. Specifically, we propose an automatic extra tax on the income of the top 1 percent of earners — a tax that would limit the after-tax incomes of this club to 36 times the median household income…

Here’s how the tax would work. Once a year, the Internal Revenue Service would calculate the Brandeis ratio of the previous year. If the average 1-percenter made more than 36 times the income of the median American household, then the I.R.S. would create a new tax bracket for the highest 1 percent of income and calculate a marginal income tax rate for that bracket sufficient to reduce the after-tax Brandeis ratio to 36.

One can think of several objections, but the primary one is: what about the next 1%? If the people in the top 1% earn 50 times the median, it seems possible that the people in the next 1% earn 40 times the median. Will you fail to tax them, then? Would it be fair to tax the top earners to the extent that their income falls below the next 1%?

Here’s another objection: the top 1% likely don’t all earn the same amount: the top 1% of the top 1% (the top 1 in 10,000) earn disproportionately more. If you fix a tax rate in such a way that the “average 1-percenter” earns no more than 36 times the median household, will you not be penalising the bottom of the top 1% and not the top?

No reputable scholarly journal would let the authors get away without answering such questions. And if they did answer them, I’m pretty sure their method would evolve into the usual kind of progressive taxation system, with higher rates for higher income brackets.

But I suppose that’s why the New York Times exists.

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