Some level of inequality is inevitable and perhaps even desirable. People aren’t equally skilled, equally smart, equally motivated, or equally hard-working. These are facts of life that will never change. Unequal outcomes must be possible in order to incentivize people to work hard and innovate, and these outcomes must be sufficiently divergent enough to make one outcome meaningfully different from another. However, this must be seen in recognition of another basic fact; that sheer luck plays as much of a role in outcome (if not more) as skill, intelligence, and drive.
Recognition of good luck and bad luck is among the reasons why we have social welfare systems. It is also among the reasons how wealth can become too unequal. Whether within an individual’s life, or between generations, the luck that occurs early on can have a compounding that makes it more difficult for the poor to get a foothold, and much easier for the already wealthy to make even more money. High wealth inequality can indicate when this effect has run amok.
One of the ways to address these problems is to place a floor on how poor a person can get. This can be done with a robust social welfare system. This welfare system also helps address bad luck; for example, universal healthcare. UH helps prevent people with bad luck in their health from being destroyed financially and physically.
Of course this social welfare system has to be paid for, and this is where taxes, particularly on high-earners, comes in. This tax isn’t to punish high earners, it is simply their duty to ensure minimal general prosperity for a society that enabled their much greater financial prosperity.
The question is how high should we raise the floor. The level of this floor determines how much we have to tax, among everyone else, the rich. I personally don’t know the exact level we should set the floor at, but like any person with empathy, I think it should be pretty high. The real problem, however, is to how to make sure the raised floor is accomplished and paid for without causing so many unintended consequences that the drop in everyone’s prosperity, the poor, the rich, and the middle class, doesn’t leave most of us worse off than before.
Inequality comes into the picture not because it is bad in and of itself, but because high levels of it can serve as a strong indicator that the general welfare is being stunted by accumulation of the people on the top at the expense of the general population. This isn’t to say low inequality always indicate a healthy country; it doesn’t. Kazakhstan is fairly equal according to the GINI coefficient, but it is not a very good country to live.
This brings me to my last point. What level of inequality is a healthy range? Well, I would say a gini coefficient between 24 and 29. That is where 9 of the 10 most prosperous countries in the world are (which includes all the Nordic countries). The US has a GINI of ~38 and is only the 18th most prosperous. And if you don’t like Legatum’s measure of prosperity, you can look at the Human Develop Index and you will see almost the same pattern.
I don’t know all or the best policies necessary to achieve the prosperity I’m looking for. However, I know what those policies should look like, and I expect proposals to be rooted in empirical evidence, not ideological dogmas. Lucky for most of us, our general prosperity has continued to rise decade after decade in spite of the growth of inequality.
I originally wrote most of this article on Reddit: https://www.reddit.com/r/AgainstUnreason/comments/nxlj3n/wealth_inequality_isnt_a_problem_in_and_of_itself/?utm_source=share&utm_medium=web2x&context=3