Why Greater Equality Makes Society Stronger.

[Vendetta]

This is a presentation based on the book The Spirit Level: Why Greater Equality Makes Society Stronger



It's rather long, but there's a great deal of information in it that will be useful when dealing with Lolbertarians, the graphs are particularly useful, showing incredibly strong correlation between income equality and social stability, and almost no correlation at all between median income and social stability.

All of the trends are mapped both internationally between developed countries and between the US states and occasionally Canadian provinces.

[Imperial Overlord]

My dad got the book for his birthday last week. I second Vendetta on this.

[Iosef Cross]

He talks about equality in the sense of income equality? That higher income equality makes societies more stable?

Of course it does: With high income inequality people start to become more envious of others, and also, with high income inequality, robbery becomes more rewarding, since robbers can find people to sob with have much more money than they can earn by working. Crime is positively correlated with inequality.

Here in Brazil, crime rates in the northeast states have increased dramatically in the last 20 years. While that was a time of tremendous economic progress for these regions. But inequality increased, that's because economic progress was concentrated into a segment of the population, while the rest remained as poor as before. This increased in inequality increased the rewards of crime, with increased crime rates.

But that doesn't mean that income inequality in necessarily "bad". If the government fights it directly, by taxing the rich and giving it to the poor, it represents an incentive to not be productive, and a punishment for the productive.

Usually, inequality levels naturally decrease with the process of development. That's because first some people get better off while the others are behind (see the Kuznets curve). Then development spreads and the entire population gets better off. Since progressive taxation is not conductive for development, its implementation in developing countries will slow down development and hence, slow down the natural reduction of inequality. In the long run, progressive taxation can increased inequality!

[Samuel]

Crime is positively correlated with inequality.

Not only that, but political inequality also flows from wealth inequality- if a small portion of the population has a large amount of the money, they have a disproportionate amount of the power. Especially if the wealth flows from natural resource extraction.

it represents an incentive to not be productive, and a punishment for the productive.

No, it reduces the incentive to be productive. As long as the amount people lose to taxes is less than the amount of money they are willing to earn in order to work extra hours, they will continue to work. It drops the equilibrium, but that might not come into play if the equilibrium point starts of above the amount of time people are willing to work.

Plus, if you use the funds to produce infrastructure and invest in human capital, you can increase productivity. Of course this requires competancy on the part of the government which isn't always available.

[Darth Wong]

I'm sick of the longstanding claim that higher taxes remove the incentive to work. Not only does it lack any kind of logical justification (the financial incentive is still there, albeit reduced in magnitude), and not only is it an obvious example of the black/white fallacy, but nobody ever tries to produce any shred of evidence for it. Canada has around two dozen billionaires, after all.

[Serafina]

I'm sick of the longstanding claim that higher taxes remove the incentive to work. Not only does it lack any kind of logical justification (the financial incentive is still there, albeit reduced in magnitude), and not only is it an obvious example of the black/white fallacy, but nobody ever tries to produce any shred of evidence for it. Canada has around two dozen billionaires, after all.

Well, the claim would be true if the taxes were rising so steep that you would not actually earn any more money.
Of course, no country in the world (well, with the possible exceptions of actually communist states) has taxes that are even remotely as high.
Furthermore, it ignores that fact that beyond a certain point, people are no longer working for the money itself. Many really sucessfull people work for the success, not the money.

[Surlethe]

Question re. the OP, since I don't have time to sit through it: does the study address the possibility that causation goes backward? That is, societies that are naturally more cohesive will be willing to work together to reduce inequality by raising taxes and redistributing wealth?

I'm sick of the longstanding claim that higher taxes remove the incentive to work. Not only does it lack any kind of logical justification (the financial incentive is still there, albeit reduced in magnitude), and not only is it an obvious example of the black/white fallacy, but nobody ever tries to produce any shred of evidence for it. Canada has around two dozen billionaires, after all.

If you rephrase it as "higher taxes reduce the incentive to work", the claim is no longer black-and-white and possesses both logical justification and empirical work. The logical justification goes like this. A person allocates his time based on how much he relatively values its different uses (so, he faces a tradeoff between things like sleep, work, family time, hobby time, etc.). All else equal, if his tax rate rises, his earned income falls, and so he will work less: the marginal benefit of his current work hours has just fallen, so he will substitute away into things like time spent with family.

Much like the debate over minimum wages, the real question here is not whether there is a negative response to taxation, but how high it actually is. And there's been plenty of empirical work done on that; economics being a profession with practical applications, there is much interest in the practical application -- taxation. (Note that some of the work done on taxation is in the context of aggregate economic growth.) If you want to check out some studies, the literature reviews in the following articles might be helpful.
http://www.fraseramerica.org/commerce.w ... havior.pdf (Note: biased.)
http://www.econ.ucsd.edu/~rogordon/growth.218.doc

Also, for fun: http://gregmankiw.blogspot.com/2008/10/blog-post.html

(PS- On the number of *illionaires, you might want to get millionaires per capita for a bunch of different countries and plot that against things like total government inlays as a percentage of GDP or highest marginal tax rate. That would be more pertinent than simply the number of billionaires in Canada.)

[Iosef Cross]

Depending of the type of tax, you can increase or decrease the amount of work people would be willing to do.

Progressive taxation reduce the incentive to work because the more you work, the smaller became your income compared to their level without the tax.

Workers work until the marginal benefit of the income derived from working a little more becomes equal to the marginal disutility of working. If taxes increase in proportion to income, the marginal benefit of working a little more decreases with the increase in taxation (with is a consequence of working more), so that the equilibrium quantity of work offered by the workers in the market become smaller than without the tax.

But if you make a regressive tax, you can make people work harder: Tax the ones that don't make much money, so they will try to work harder and make more money to scape from the taxes. The marginal benefit of working a little more becomes higher than without the taxes and hence, workers work harder.

[ArmorPierce]

But that doesn't mean that income inequality in necessarily "bad". If the government fights it directly, by taxing the rich and giving it to the poor, it represents an incentive to not be productive, and a punishment for the productive.

Over simplistic model and it is wrong. I recall my economics professor making note that after a certain income level, people start valuing 'leisure time' more than they do earning another dollar. At lower levels it still doesn't really put a dent. Furthermore, people who earn more tend to spend less and save more, so the money is better reinvested into the economy by increasing that of lower incomes.

Usually, inequality levels naturally decrease with the process of development. That's because first some people get better off while the others are behind (see the Kuznets curve). Then development spreads and the entire population gets better off. Since progressive taxation is not conductive for development, its implementation in developing countries will slow down development and hence, slow down the natural reduction of inequality. In the long run, progressive taxation can increased inequality!

THIS IS ABSOLUTELY FALSE. In the United states, the divide in income between the rich and poor has been growing dramatically, not shrinking, over the past few decades. As for progressive taxation not working, you shift the tax burden to the poor which I already pointed out why it's bad above. They have high fixed costs (necessary spending) and low variable spending (discretionary spending).

You are making a lot of assertions and giving it out as fact and building from there without quantifying it nor providing evidence for it. Please provide actual evidence supporting you assertions.

[Surlethe]

THIS IS ABSOLUTELY FALSE. In the United states, the divide in income between the rich and poor has been growing dramatically, not shrinking, over the past few decades.

Yes, but the US has concurrently undergone a major shift away from government regulation and redistribution toward a freer market (which naturally favors the wealthy). Since this complicates the situation, you can't just cite the US as a specific counterexample. I'd prefer to ask whether growth itself naturally causes greater equality, or whether growth causes people to seek government policies which favor redistribution (e.g., because leisure time is less costly, you have more activism, etc.).

[The Duchess of Zeon]

And yet for all IC makes these arguments, the reality is that two of the richest men in the world are both Swedes, in a society which virtually is the type-standard for social democracy. Nobody wants to go further in implementing a socialist agenda in the US today (except fanatics whose ideological spectrum equivalents are Tim McVeigh et. al.) than Sweden, and yet of the world's mega-rich, 2 of the top 15 richest people in the world live in Sweden..... And only 5 in the United States, despite Sweden having a population 35 times smaller than the USA. When one actually looks at evidence it seems to suggest that you are 14 times more likely to end up a contender for richest person in the world if you're born in Sweden than if you're born in the USA. So what disincentives do the Swedish taxes create magically in fact of someone who, evaluating how hard they want to work in Sweden, can see that despite the higher taxation they are fourteen times more likely to end up one of the world's richest people?

[Surlethe]

I was thinking about this earlier -- you have to control for mobility, too. When you're one of the fifteen richest people in the world, you can go anywhere you want. So naturally, you will go to the location with the most favorable tax code? I'd thought so earlier today, but that's maybe not the case -- if you are so vastly wealthy, the taxes you pay on your investment income will have a miniscule impact on your lifestyle. I'm not sure how connected the distribution of the 15 richest people in the world is to incentive/disincentive to work for people who can't move wherever they please.

[Mayabird]

People make a lot of noise about moving to places where the taxes aren't so high or voting with their feet because they dislike the policies, but I have never seen any evidence that people do this at any sort of statistically measurable scale. People will move away from places if there are no opportunities (for work or whatever else) or will move elsewhere if there are opportunities or better ones. That's what decides it for the vast majority of people. It's possible that policies and taxation might have an impact on those two conditions, but higher taxes in the city won't keep people from moving there instead of Bumblefuck, Nowhere if the jobs are in the cities.

[PeZook]

But if you make a regressive tax, you can make people work harder: Tax the ones that don't make much money, so they will try to work harder and make more money to scape from the taxes. The marginal benefit of working a little more becomes higher than without the taxes and hence, workers work harder.

You're doing the basic mistake of amateur economists (and some professional ones, too, sadly): you're divorcing your model too far from reality by ignoring crucial variables.

Your first assumption is that it's possible for a worker to earn enough money to jump into the next tax bracket simply by working harder - essentially, you're assuming employers are willing to pay an arbitrary amount of money for work of an employee, even if they do not require any more work from that employee. Jumping into a higher income level is not fluid, it requires a promotion (often not an option for lowest-paying jobs) or a career change which often means retraining or a period of joblessness which most people just plain cain't afford.

This leads us to your second assumption: that social mobility is equivalent on all levels. As Armorpiece pointed out, when your income is close to fixed costs of living, you will not have the capital to advance socially by purchasing things like education. Often you will not have time, either, since time-saving services will be unavailable (part of the phenomenon known as the "ghetto tax"). By making taxation regressive, you're only compounding the problem by throwing another obstacle on the path of such people.

Effectively, once you reach a certain income level, it's easy to devote time and resources to improving yourself, even if you pay a higher proportion of your income. Especially since progressive taxes don't tax your entire income: only the certain tax bracket. So if the US had a tax bracket of 90% (it used to) for all income above 100 000, and you earned 110 000, you'd still have enough disposable income to live quite comfortably.

[Shroom Man 777]

But if you make a regressive tax, you can make people work harder: Tax the ones that don't make much money, so they will try to work harder and make more money to scape from the taxes. The marginal benefit of working a little more becomes higher than without the taxes and hence, workers work harder.

Would "filing resumes and going to more job interviews, despite being turned down often, because of the difficulties regarding employment" qualify as workers working harder and make them eligible for decreased taxes? Or would we be unfairly lumping more burdens on those who are currently incapable of meeting them due to unfortunate conditions, because we like blaming "lazy people", and then we can use this policy to lower taxes on mega-ultra-binillionaires because they work "so hard" and thus somehow are less eligible for paying high tax prices despite their disproportionately higher incomes compared to those people who can't pay for shit because of their difficult low socio-economic conditions that are hard to overcome?

[ArmorPierce]

I was thinking about this earlier -- you have to control for mobility, too. When you're one of the fifteen richest people in the world, you can go anywhere you want. So naturally, you will go to the location with the most favorable tax code? I'd thought so earlier today, but that's maybe not the case -- if you are so vastly wealthy, the taxes you pay on your investment income will have a miniscule impact on your lifestyle. I'm not sure how connected the distribution of the 15 richest people in the world is to incentive/disincentive to work for people who can't move wherever they please.

Several things wrong with this.

One
According to surveys, the top richest people actually tend to be liberal rather than conservative. Probably due to, like you said, the increased taxes makes a blip on the radar in what the life style that they are able to live.

Two
It's not as mobile as you may think.

Sure, they may be able to go somewhere that has more favorable taxes, but most of those places a non-english speaking shit-holes. Rich people want all the advantages of living in a developed 1st-world english speaking languages but don't want to pay their dues for it.

So if a rich person wants to move to a first-world english speaking country, choices are Australia, New Zealand, UK, Canada and Ireland. All but one has higher taxes.

There are other countries, Jamaica, Guyana, India, etc... but come one, I don't really expect them to actually desire to move there.

Further, will they be able to make the same income living in a foreign country like that? Unless they are wealthy enough to live a rich life style based purely through their own investments, probably not.

Yes, but the US has concurrently undergone a major shift away from government regulation and redistribution toward a freer market (which naturally favors the wealthy). Since this complicates the situation, you can't just cite the US as a specific counterexample. I'd prefer to ask whether growth itself naturally causes greater equality, or whether growth causes people to seek government policies which favor redistribution (e.g., because leisure time is less costly, you have more activism, etc.).

True, but it seems like that IC is asserting that economic growth will necessarily end up making society more equal. He is stating that a freer market is what makes society more equal. He is actually pro-regressive taxes!

[Eleas]

So what disincentives do the Swedish taxes create magically in fact of someone who, evaluating how hard they want to work in Sweden, can see that despite the higher taxation they are fourteen times more likely to end up one of the world's richest people?

Even funnier, at the time Ingvar Kamprad of IKEA was making money hand over fist, good old Astrid Lindgren was actually taxed at 102 percent of her income. Yeah, it led to a few raised voices and a good deal of ire before eventually being changed, but still, for any good hard-core libertarian, that should be the horror story to top them all. And yet, it seems that materially we're still doing pretty well. Funny how these things work out.


(Please note that despite my flippant tone I'm emphatically not mocking those people on this board who are in genuinely dire economic straits due to taxation issues.)

[Samuel]

How does that work? How can you pay 102% taxes?

[ArmorPierce]

I am guessing the marginal tax rate was at 102%?

[Eleas]

I am guessing the marginal tax rate was at 102%?

Indeed it was.

[Spoonist]

So what disincentives do the Swedish taxes create magically in fact of someone who, evaluating how hard they want to work in Sweden, can see that despite the higher taxation they are fourteen times more likely to end up one of the world's richest people?

Just a few notes.
-IKEA was/is set up as a foundation. Nowadays a dutch one because of the secrecy available to them. So it was never a corporation for tax purposes in Sweden. Ingvar Kamprad (starter/owner) moved to switzerland when he started to want to get a higher salary from the foundation. Because of the secrecy laws it is only speculation about who in the Kamprad clan really owns/controls IKEA so his position on the list is speculation as well.
-The best tax payer (net) in Sweden 2009 is Stefan Persson (forbes 13th pos) with a whopping 797 000 000 SEK ($111 000 000). He alone pays as much as the ten next payers summed up.
-If you look at Swedish companies there are a couple of trends. A) starting cheap retail concepts in Sweden works great B) free education gives higher innovation C) while taxes for working/living is high its corporate taxes are comparably low D) sweden is placed really low in corruption and bureacracy E) usually concepts that work in sweden can be implemented abroad as well F) in spite of ignorant propaganda abroad the swedish work force is higly motivated and have a high work ethics G) the swedish work model with union and company negotiated deals has almost eliminated strikes etc
-Another thing to note is that most successful swedish companies move abroad to continental europe when they become a global player.

[Jalinth]

So what disincentives do the Swedish taxes create magically in fact of someone who, evaluating how hard they want to work in Sweden, can see that despite the higher taxation they are fourteen times more likely to end up one of the world's richest people?

Just a few notes.
-IKEA was/is set up as a foundation. Nowadays a dutch one because of the secrecy available to them. So it was never a corporation for tax purposes in Sweden. Ingvar Kamprad (starter/owner) moved to switzerland when he started to want to get a higher salary from the foundation. Because of the secrecy laws it is only speculation about who in the Kamprad clan really owns/controls IKEA so his position on the list is speculation as well.

The Netherlands is probably the biggest respectable tax haven in the EU at the moment and has been for a good length of time. And the "charitable foundation" that owns IKEA is pretty questionable. This article, while almost 5 years old, gives an idea http://www.economist.com/business-finan ... id=6919139

[Iosef Cross]

I don't know if this is necro, but I think not, since the last post is 10 days old. The official policy here is for 30 days to be necro?

But if you make a regressive tax, you can make people work harder: Tax the ones that don't make much money, so they will try to work harder and make more money to scape from the taxes. The marginal benefit of working a little more becomes higher than without the taxes and hence, workers work harder.

You're doing the basic mistake of amateur economists (and some professional ones, too, sadly): you're divorcing your model too far from reality by ignoring crucial variables.

And you are what?

Your first assumption is that it's possible for a worker to earn enough money to jump into the next tax bracket simply by working harder - essentially, you're assuming employers are willing to pay an arbitrary amount of money for work of an employee, even if they do not require any more work from that employee. Jumping into a higher income level is not fluid, it requires a promotion (often not an option for lowest-paying jobs) or a career change which often means retraining or a period of joblessness which most people just plain cain't afford.

If course if the effect of the regressive tax is not continuous, them it's results doesn't always hold. Also, I am assuming that the supply of labor is continuous: you can chose how many seconds you will work per day.

I am assuming that there aren't tax brakes: That the total amount of tax you pay is a strictly concave function of your income. While your income is and identity function of your income, so that for every penny you make by working a second more with flat tax, you will make more with regressive. In that case people will always work a little harder than with flat taxes!

I expect that someone with has some competence to judge whether this is a mistake or not should have understood that I was assuming a continuous set of choices in the part of the worker.

This leads us to your second assumption: that social mobility is equivalent on all levels. As Armorpiece pointed out, when your income is close to fixed costs of living, you will not have the capital to advance socially by purchasing things like education. Often you will not have time, either, since time-saving services will be unavailable (part of the phenomenon known as the "ghetto tax"). By making taxation regressive, you're only compounding the problem by throwing another obstacle on the path of such people.

I am assuming fixed wages per hour.

Of course, if you assume that workers can chose to accumulate human capital to increase their hourly productivity, well, in that case regressive taxes will have an even larger effect.

In this case, your apparent objection actually strengthens my argument. Even if it may be more difficult for people with lower initial incomes to accumulate human capital. If it is impossible for low income people to accumulate human capital, them my argument stands on its original (simpler) basis.

[Iosef Cross]

But that doesn't mean that income inequality in necessarily "bad". If the government fights it directly, by taxing the rich and giving it to the poor, it represents an incentive to not be productive, and a punishment for the productive.

Over simplistic model and it is wrong. I recall my economics professor making note that after a certain income level, people start valuing 'leisure time' more than they do earning another dollar. At lower levels it still doesn't really put a dent. Furthermore, people who earn more tend to spend less and save more, so the money is better reinvested into the economy by increasing that of lower incomes.

You are using what economists call 'the income effect'. I have already excluded the 'income effect' from my argument, by assuming implicitly that the income reached with flat taxes is feasible to the worker with regressive or progressive taxes.

Of course, if you assume that leisure is a superior good, while income is a inferior good, them regressive taxes will make poor people work harder for two reasons: They will pay taxes, and due to the wealth effect they will work harder with smaller incomes due to these taxes, and taxes that decrease with the amount of work made (regressive taxes), will increase total working hours by marginal effect.

Usually, inequality levels naturally decrease with the process of development. That's because first some people get better off while the others are behind (see the Kuznets curve). Then development spreads and the entire population gets better off. Since progressive taxation is not conductive for development, its implementation in developing countries will slow down development and hence, slow down the natural reduction of inequality. In the long run, progressive taxation can increased inequality!

THIS IS ABSOLUTELY FALSE. In the United states, the divide in income between the rich and poor has been growing dramatically, not shrinking, over the past few decades. As for progressive taxation not working, you shift the tax burden to the poor which I already pointed out why it's bad above. They have high fixed costs (necessary spending) and low variable spending (discretionary spending).

In Brazil inequality increased greatly between 1940 and 1980. Now it is decreasing since ~2000. Between 1980 and 2000 inequality and GDP stagnated. In 1940, 80% of the population was made by illiterate farmers, with ate what they grow. By 1980, 70% of the population lived in the cities, but there was a large proportion of people that still lived as subsistence farmers. Hence, social inequality increased brutally between 1940 and 1980, by 1980 there were two Brazil's, a richer city dwelling country, concentrated in the southern and central regions and a poorer country dwelling population, concentrated in the northeast region. Now, in the last 10 years, inequality is decreasing while the poorer regions in Brazil are being developed.

In the US, between 1975 and 2010 incomes didn't increase much. Also, in 1975 the US was already a fully developed country.

You are making a lot of assertions and giving it out as fact and building from there without quantifying it nor providing evidence for it. Please provide actual evidence supporting you assertions.

You too.

[Iosef Cross]

But if you make a regressive tax, you can make people work harder: Tax the ones that don't make much money, so they will try to work harder and make more money to scape from the taxes. The marginal benefit of working a little more becomes higher than without the taxes and hence, workers work harder.

Would "filing resumes and going to more job interviews, despite being turned down often, because of the difficulties regarding employment" qualify as workers working harder and make them eligible for decreased taxes? Or would we be unfairly lumping more burdens on those who are currently incapable of meeting them due to unfortunate conditions, because we like blaming "lazy people", and then we can use this policy to lower taxes on mega-ultra-binillionaires because they work "so hard" and thus somehow are less eligible for paying high tax prices despite their disproportionately higher incomes compared to those people who can't pay for shit because of their difficult low socio-economic conditions that are hard to overcome?

1- You are using a transaction costs argument, where the costs of choosing another quantity of labor to offer to the market are higher than the net increase in utility. However, if you give them infinite amount of time to affect their decisions, the transaction costs of changing the amount of labor offered will be lower than the benefits accumulated.

2- Besides, I didn't make any ideological judgment about regressive taxes. But that they would make poor people work more hours, they would have such tendency.