You Can’t Redistribute Income . . .

. . . but you can and should redistribute consumption.  Here’s Matt Yglesias discussing a recent post by John Quiggen:

John Quiggin makes the case that redistribution of income away from the top 1 percent is essentially the only thing that matters in American politics. After all, as Willie Sutton said, “that’s where the money is.”

I’m all for that, but I really do think it’s an unduly limited view of political life.

Income really is the Achilles heel of the progressive movement.  The income statistics simply don’t mean what progressives think they mean–something like “resources available for redistribution.”  If you want something closer to resources available, you’d use consumption, or wage income.  If you combine wage and capital income in the same aggregate, you are counting the same resources twice.  This is deeply counter-intuitive, yet all public finance economists understand this.  The policymakers in Nordic countries understand this.  But progressives don’t seem to understand this.  Even Paul Krugman, who must know better, keeps citing income distribution data, which is about as informative as examining the entrails of a chicken.

A rich guy with lots of income has three choices, consumption, savings/investment, and charity.  Let’s dispose of charity quickly.  Yes, we could redistribute the money Gates in spending on malaria in Africa, and give it to other Americans.  Would that be a gain?  I think everyone would say no.  On the other hand if a rich guy gives a lot of money to Princeton, to have his name on a building, perhaps that’s really a form of consumption.  I’m fine with treating it that way, if the tax authorities decide that’s the way to go.

But the real money here is obviously in the consumption/investment categories.  You can redistribute consumption from the top 1% and give it to average Americans working in a car factory, or a Walmart.  But it’s an illusion to think you can redistribute investment from the top 1%, so that average Americans can have a higher living standard.  Where do people think the car factory comes from?  Or the Walmart building?  BTW, this has nothing to do with trickle-down economics, a theory I reject.  This is simple accounting.  Money put into investment projects isn’t available to boost living standards for the lower classes, unless you don’t do those investment projects.

So what’s available to be redistributed?  Basically consumption (including a modest amount of vanity charity.)  And that’s it.  Now come back to me with the consumption distribution data, and let’s see what that looks like.  I predict that consumption inequality is far lower than income inequality.  And that consumption inequality is rising at a far slower rate than income inequality.  I’m not saying there’s no problem, but it’s way smaller that the progressives imagine, as the data they use is pure nonsense.  Consumption inequality is economic inequality.  Income inequality is . . . well it’s meaningless gobbletygoop.

This Will Wilkinson posts cites study after study supporting my consumption inequality claim.

I’m not trying to make an Ayn Randian argument here.  I favor 4 types of income redistribution, on utilitarian grounds:

1.  Education vouchers

2.  Catastrophic health insurance

3.  Government subsidy of HSAs for low income workers.

4.  Wage subsidies for low income workers, combined with abolition of minimum wages and occupational licensing.  Thus a single mom with two kids making $8 hour, might get a government subsidy of another $8 hour.  And someone making $16/hour might get a $4 hour subsidy.  But they have to be employed.  Have government jobs paying 1 cent per hour as a residual, for those claiming they can’t find a job.  Give them a $12/hour subsidy.

They would also get the other three subsidies discussed above.  As one’s income rose, one would get less and less of a HSA subsidy, but I’d probably make the education voucher and catastrophic insurance universal.  Importantly, I’d try to spend less on education than we do now.

You do all this redistribution with two consumption taxes; a VAT and a progressive payroll tax.  Plus perhaps some other taxes on efficiency grounds (carbon, land, etc.)  No personal or corporate income taxes, no forms to fill out.  K.I.S.S.

BTW, other than my quibble over “income,” I basically agree with the thrust of Yglesias’s post.

PS.  Oh, and get rid of the debt ceiling, for God’s sake.

About Scott Sumner 490 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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