How to Promote Both Greater Economic Equality and Greater Prosperity

Much has been brought to light in recent months about economic and social inequality.  How one group prospers while another does not.  We can have both greater equality and greater prosperity if we just implement the smartest economic and land taxation policies available to us.

Economic inequality is a social and an economic problem. There are some economists who remain puzzled by the increase in economic inequality since the 1970s. Why has total output increased by a greater proportion than wages? Where is the greater productivity going, if not to wages?

One reason why wages have not risen as much as before is that economies have become more globalized. The greater ability to out-source work has increased the effective labor supply. Another cause is increasing automation and the resultant elimination of jobs (higher-wage jobs, in particular). But the replacement of domestic labor with foreign labor and with machines depends on relative labor and production costs. Governments have imposed higher costs with taxes on the employment of labor, on goods, and on trade. If not for income and sales taxes, there would have been less outsourcing and automation.  My previous articles, Economics for Conservatives and “Economics for Progressives address this thought process.

Policy can either only treat the effects of social problems or alternately it can also eliminate the causes of these problems. Calls to reduce inequality by taxing wealth and high income only treat the symptoms, and have their own negative effects. We should look at the sources of inequality, rather than blindly tax the rich just because they are wealthy.

The two basic, original causes of economic inequality are entrepreneurship and subsidy. (There is also inherited wealth, but we are looking at the original sources of the wealth.) An entrepreneur who starts or improves a business, who provides new and better products, who innovates, is benefiting society, should not be stifled with taxes and arbitrary restrictions.

It’s not fair for a person to get rich because their political clout helps them or their clients obtain large government subsidies.  They should be prevented from getting wealthy at the expense of taxpayers and consumers. Much of agricultural subsidies, for example, go to the biggest farms, not to the farm workers.

The largest subsidies are implicit in the form of not paying the full costs of production or in obtaining higher land value from government’s public goods. Therefore, for one example, there should be pollution levies that compensate for imposing a social cost. There should be taxes on the land rent generated by public goods.

Research has found that much of the inequality in the economy has its origin in real estate, in the ownership of land. Much of the gain from economic growth is captured in higher land rent and land value. Low taxes on land combined with high taxes on labor have produced the great economic imbalances that are low wages and high housing costs. This can be reversed by untaxing labor and shifting the obtaining of public revenue to land value.

As Matthew Rognlie from the Massachusetts Institute of Technology stated in his article, Deciphering the Fall and Rise in the Net Capital Share: Accumulation or Scarcity?: In a sense, then, the lesser role of land is due to the idiosyncrasies of national accounting.

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