One of the recurrent themes in Occupy Wall Street movement of last year has been the increase in the income inequality in the last three decades. Although it's true that income inequality has increased over the last 3 decades in the US it's still below historical low levels over the past century as this report by IMF shows. Is I income inequality really bad ? Will inequality create a more wealthy world ? Is social mobility and economic growth more important than reducing income inequality ?
Inequality in income occurs due to various factors including luck, talent and hard work. A region in the world blessed with lots of rain or oil is likely to produce more wealth than a region which doesn't have either. A genius in consumer electronics in last few decades would have improved more lives, possibly become more wealthy, with iPhones and Tablets than an even smarter engineer who studied astrophysics and gravitational force on Mars.
Is it fair to steal or force rich people give money to the poor so that income inequality is reduced ? It's harder to answer this question in today's world where the rich are demagogued so let me reduce this problem to a simpler times and try to find an answer there. Imagine that we still lived in a world that sustained itself by farming and hunting. Let's say a farmer Tom worked hard and with some good luck produced 10,000 pounds of wheat while another farmer Harry could only produce 7,000 pounds of wheat either because he worked less hours or he planted bad seeds or he had some bad luck with the weather.
Is it better to force Tom to give a large portion of his produce to Harry or is it better to allow Tom to keep most of his wheat and let him decide what to do with his produce ? Tom may not need all the wheat he produce and therefore he will find ways to get rid off the excess wheat and will try to exchange his excess wheat for work or other produce from Harry or other farmers in the society. This will result in a system where the farmer who produced good results to continue to focus on more farming and others who have been less successful in either assisting the successful in his farm or taking on other forms of work. If a village elder decides to take away Tom's wheat and distribute it equally among all the villagers then Tom will have no incentive to work hard next year to produce the best result he could as he know that he will be paid by the village elder irrespective of his hard work.
The important thing to note is that a free market will distribute the means of production in a way to produce maximum wealth. What about next year when Harry wants to improve his farming skills or borrow farming equipment from others to improve his production ? What about Tom's and Harry's kids ? Will they have access to less farm land because of their father's mistakes or fortunes ? This is where income inequality meets social mobility. In order to ensure that the best hands are put at the means of production it's important to ensure that there are opportunities for people who have failed once due to bad luck get an opportunity to try again. If there's no social mobility then we will end up in a society with accidental millioners who will continue to control larger portions of production while the truly talented people will left behind without having the right amount of influence on important decisions.
In order to ensure social mobility in todays's world where formal or informal training and education is necessary to succeed it's important that every child gets access to the best education that the society can provide irrespective of the zip code or school district that they are born in. This means all public education should be turned into a direct payment to parents who can then choose to spend those dollars to send their kids to any public school they choose. This will ensure that the schools will compete for students and the good schools will get a larger portion of the students and expand into more franchises while the poorly performing schools will shunt down and will be replaced by franchises of excellent schools. Providing every child access to best education will set the stage for everyone in the society to have a good shot at either starting their own companies, creating the art they like, becoming athletes and pop stars or pursuing whatever career they want to pursue.
In order to encourage people to work exceptionally hard they should be promised exceptional rewards. If American Idol only awarded $10 and did not provide opportunity for winners to sign up lucrative record deals then thousands of young people will not prepare months for it. If college football didn't lead to million dollar contracts in NFL then thousands of young people wouldn't work hard tirelessly for years in high school and college to get to their goals. Why is it OK for college football coaches to earn multimillion dollar contracts while it's evil for corporate CEOs to earn the same ? College football coaches decide how 22 players on the field run up and down the football field but CEOs of multinational companies like Walmart decide where 2 million people stand and how they speak and interact with people and machines for 8 hours each day. It's really crucial for any society to get the brightest and the most hardworking among us in critical positions as those of a CEO of a big corporation. The best way to attract best talent and demand hard work is to promise success and glory for those work.
Great successes needs great motivation and to discoure success by robbing the rich and handing the money over to bureaucrats to distribute it among their lobbyists is not the best way to allocate resources. Government should be focussed on improving social mobility and forget about income inequality as there will always be income inequality in a society where an writer can write a book once and produce millions of copies of his work with little effort and there are so many factors including luck that will determine who produces more wealth each year. A flat tax that tells the society including the rich that we believe in fairness will result in society where the rich will not see the government as it's enemy and the respect for rule of law will be supreme. It's also unfair to give preferential treatment to capital gains taxes as if capital is superior to labor. Capital is nothing but savings from yesterdays labor. All forms of income should be treated equally with the same tax rate. There's also a need to create a small wealth tax similar to property tax as the wealthy enjoy the benefits of big portions of the government including army and police more than the poor. The army and justice system provide protection to wealth of every citizen and there should be a wealth protection tax for everyone which will provide for any reduction in taxes due to a flat tax system.
A society should be judged on how many people can move easily from poor to middle class and to the rich during their lifetime and not by how many people belong in each category.