The Failure of Income Redistribution

By Logan Albright

The spectre of income inequality is one that refuses to be silenced in a political climate saturated with news of Occupy protestors, AIG bonuses and faceless corporations deemed too big to fail. The level of outrage is understandable, but it’s time to acknowledge that decades of government redistribution of wealth through taxes and transfer programs have done nothing to reduce inequality. Empirical evidence suggests that redistribution simply doesn’t achieve its intended goal. Regardless of ideology, we should all be able to agree that it is folly to pursue policies that don’t work, and that perhaps we should start looking for answers elsewhere.

Whether or not an unequal distribution of wealth is an economic problem is a matter of some disagreement, but there can be little doubt that it is a political problem, and therefore we can expect politicians and pundits to continue arguing over how best to address it. Usually, such discussions quickly dissolve into populist talking points about how the rich are not paying “their fair share,” followed by draconian efforts to increase the progressivity of the tax code. Catchy sounding proposals such as “The Buffett Rule” are trotted out, and billionaires are summoned from their gem-encrusted palaces to receive a televised tongue lashing at the hands of congress all for the benefit of political optics.

All this fails to take into account that, when you measure progressivity by the portion of the tax burden that falls on the richest Americans, the tax code has become increasingly progressive at the same time that income inequality has increased. Similarly, a larger share of Americans than ever before now pays no income taxes at all. Yet the left continues to howl that tax rates should be higher for those already bearing most of the cost of increasingly generous social welfare programs, while the recipients of these benefits should be further subsidized, all in the name of social justice.

Leaving aside for a moment the inherent lack of fairness in such a system, it is time to acknowledge that, from an empirical standpoint, it just doesn’t work. If the goal is less income inequality and more social mobility, the forced redistribution of wealth through the tax code has clearly not been effective, nor is there any reason to believe that it ever will be, regardless of how high the rates climb.

Robert Nozick, in his influential 1974 work of political philosophy Anarchy, State and Utopia, elegantly illustrates why redistribution schemes are destined to fail. Assume, Nozick says, any distribution of wealth as a starting point, including perfect equality. Assuming that people are still free to make their own decisions about spending and investing, any starting distribution will be upset by the emergence of extraordinary individuals. Nozick uses the case of Wilt Chamberlain, but a more contemporary example might involve someone like Steve Jobs. From any starting distribution of wealth, people will willingly trade some of their money for iPads and Powerbooks until Jobs, by virtue of his uncommon talent, emerges as fantastically wealthy compared to the rest of the population. Nozick argues that such an outcome is just, since it was arrived at through free and consensual exchanges from a just starting point, but it is not necessary to accept this conclusion to understand the larger point.

Unless consumers are prevented from consuming, a simple redistribution of wealth through taxes or any other means will not reduce income inequality. Not only is this concept theoretically sound, it has proven to be empirically true, although few seem willing to recognize this fact. A practical policy approach for reducing income inequality has yet to be determined, but it would most likely involve some sort of human capital development in the form of education or the training of specific skills rather than simply throwing money from one place to another and hoping it sticks. If history is any guide, it won’t.