Too much money is the real cause of income inequality

At a dinner party I attended recently, I struck up a conversation about income inequality with an acquaintance, who is a school teacher in Jefferson County, The solution, I was told, is obvious — people at the high end of the income scale should be taxed more. After all, the highest tax rates in the 1950s ran over 90 percent.
While it is true that these rates were on the books, virtually no one actually paid them. Incredulously, I asked if they believed that some people should have their incomes taxed at the rate of 90 percent. The school teacher said “yes.”
The concept of progressive taxation is addressed in the hot new book in economics, Capital in the Twenty-First Century by French economist Thomas Piketty, who concludes that a “wealth tax” is in order to redistribute wealth “more equitably.”
In fact, Piketty’s native France has indeed gone down that path. France’s socialist president, Hollande, came up with the idea of a “millionaire tax.” If you want to have a good laugh there is a video clip on the Internet of an appearance by actor Will Smith on French TV. When asked if he felt he should pay more in taxes since he made so much money, he replied that he was OK with that. The show’s host then informed Smith that France was contemplating a tax of 75 percent on incomes in excess of a million euros. A shocked Smith muttered the words “God bless America” as the panelists on the program erupted in laughter.
The legislative and judicial process leading up to the enactment of the law caused an exodus of many of the affluent in France. These would include French society’s most productive and talented citizens. With it went capital desperately needed for job creation. According to Bloomberg, joblessness in France is currently at an all-time high with the unemployment rate hovering around 11 percent. Among those 25 and under, the unemployment rate is over 23 percent.
Comedian Bill Maher, who has a reported net worth of $23 million, proposes that the government institute a “maximum wage” of $300,000 per year. Actually, a maximum wage was proposed by President Roosevelt in 1942 but Congress wouldn’t go along with it. It called for a 100 percent marginal tax rate for all income in excess of $40,000 for the duration of the war. The marginal tax rate for income up to that level would have created an “income ceiling” of $25,000, roughly $300,000 in today’s dollars. Above that everything would have gone to the government. Progressive taxation gone wild.
Extreme disparities in income and wealth within the work force is a serious issue and is considered by some economists to be an indicator of coming economic turmoil. The wealth and income gap reached an extreme in the U.S. in 1929 and was followed by the Great Depression. It did not reach similar proportions again until 2007 and shortly thereafter there was what has come to be called the “Great Recession.” Extreme income dispersion is on the rise again and is a cause for concern.
However, addressing this concern through the use of government force and fiat by enacting wage minimums or maximums or progressive taxation haven’t worked. The reason for this is that they address the symptom and not the systemic cause. Government policies are actually the cause of the problem. What enables extreme income dispersion is inflation – creating too much money, issuing too much currency. When too much currency is printed or issued it benefits those chosen by government to receive it first, before it depreciates in value. That is what happened in the 1920s and that is what is happening today.
Up until 1971 the value of the dollar was pegged to the “official” price of gold. There was a constraint on how many dollars could be issued, or rather there was supposed to be. Unfortunately, the keepers of the money printing press could not maintain discipline and the U.S. was forced to abandon the gold standard entirely. Further, wage and price controls were instituted – a government-mandated maximum wage and a government mandated price. It is no coincidence that since then the U.S. has experienced widening trade deficits, the loss of jobs overseas and a stagnation in income for those of us in the middle class. And yes, the rich have gotten richer. They got richer because they could keep up with inflation through investments while the poor and the middle class could not. Inflation erodes buying power and slowly takes back raises in pay. It’s an insidious process.
As the dinner party conversation was wrapping up, I suggested that better teachers deserved to be paid more. The response? It wouldn’t work. Supervisors weren’t competent enough to evaluate performance properly. Decisions would be based on politics. That pretty much makes my point for me.
— Elliot Simon writes from Harpers Ferry

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