Political Economy

A tax on inequality, or a tax to keep inequality at the current level?

Jan 31 '12

My sometime coauthor Aaron Edlin cowrote (with Ian Ayres) an op-ed recommending a clever approach to taxing the rich.

In their article they employ a charming bit of economics jargon, using the word “earn” to mean “how much money you make.” They “propose an automatic extra tax on the income of the top 1 percent of earners.” I assume their tax would apply to unearned income as well, but they (or their editor at the Times) are just so used to describing income as “earnings” that they just threw that in. Funny.

Also, there’s a part of the article that doesn’t make sense to me.

Ayres and Edlin first describe the level of inequality:

In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household.

Then they lay out their solution:

Enough is enough. . . . we propose an automatic extra tax on the income of the top 1 percent of earners — a tax that would limit the after-tax incomes of this club to 36 times the median household income.

This seems fair enough to me, but one thing that puzzles me is: my impression is that Ayres and Edlin feel that the rich have too much as it is already? So why freeze inequality at the current rate? (Yes, inequality could decline, but if it’s on an inexorable upward trend, my quick guess would be that maxing this ratio at 36 would be nearly equivalent to setting the ratio to 36.) Given the U.S. budget crisis, why 36? Why not 30, or 20, or 15?

P.S. When we last heard from Ayres he was supplying advice for young people who were rich or expecting to be rich. So I think it’s fair to say he’s no class warrior, that he’d like to keep income inequality at the current level but no lower.

And please note that I’m neither endorsing the Ayres/Edlin plan nor criticizing it. (Given my lack of expertise in macroeconomics, I’m certainly not the one you’d go running to, asking for an informed opinion on a proposed tax plan.) I’m just asking a question.