Is there sound justification for income inequality?

Previously published in the Terre Haute Tribune Star, January 27, 2007

Income inequality is growing in the United States. So what. Does income inequality, per se, translate into anything the larger society should be concerned about?

Examining societies cross-culturally, there is a relationship between the degree of income inequality within the society and the stability of the society. Once inequality gets to a certain point, the society shows more instability. The distribution of income in the U.S. looks more like that found in developing countries than in other industrial democracies.

Income inequality in the United States has been increasing since the 1980s. Are we seeing increasing signs of political and social instability? What I see is more evidence of beliefs and political trends that will support increasing income inequality in our society.

A special report by the “Tax Foundation” on American attitudes on tax and wealth released in April 2006 asked a cross-section of 2,017 adults the following question: “Do you personally favor or oppose completely eliminating the estate tax — that is, the tax on property left by people who die?”

Sixty-eight percent of respondents favored elimination. The authors are surprised given that only about 1 percent of taxpayers are ever hit with this tax. Had that fact been provided in the question, the responses might have been different. Nevertheless, the report suggests that taxes on wealth (property and large sums of money) are viewed as more unfair than taxes on income or sales tax.

Could this signal a change in beliefs about income inequality as well as who should pay for the government services and infrastructure in our society? Sixty-three percent of respondents indicated that the 42.5 million taxpayers who file a return but pay no tax is unfair, that everyone should pay something. Whether the respondents thought those 42.5 million were rich or poor, we don’t know because, again, the survey didn’t provide facts for people.

Work of the kind that required one’s own sweat and labor once was a moral aspect of material success. Those who worked hard were viewed as deserving of whatever they got. But it is pretty clear now, with things like lotteries, stock markets, and the windfall of inheritance, that beliefs have pretty much changed. The Tax Foundation report, I thought, had an interesting insight. Taxes should only be on things that people directly influence like work or sales taxes on what you buy. Those things that are not the result of one’s direct behavior, like rising residential property values, the stock market, or an inheritance, shouldn’t be taxed as much or at all. In short, tax effort not windfall.

In my classes I find growing acceptance on the part of students of a sociological theory of inequality and “stratification” (structured inequality) that doesn’t carry the day when one balances the evidence for it against other theories of inequality and stratification. Nevertheless, this theory “sounds right” because it fits (and apparently is fitting better and better) with an ideology that is more accepting of (growing) income inequality.

In short, the “functional” theory of stratification holds that people who are more highly paid deserve it because they hold the most important positions in society. Talent is rare and in order to motivate the talented to take on the training and added responsibility the important positions require, it is necessary to reward them more than others.

But there is more. Those at the top are also morally superior to others because they recognize their importance to the society and act not out of self-interest but in the wider interests of the society. Those in the middle and below act out of self-interest. Of course, this says nothing about the holders of municipal bonds, large stock accounts, owners of institutional investing firms, or those who inherit vast fortunes like Sam Walton’s children.

If this is sounding good to you, yes, it is a great justification for the higher pay and perks of those at the top. “For the good of society, CEOs must be paid more.” If so, they should get together and fund a think tank of sociologists to study and refine this theory of inequality and stratification.

The problem is that the growing income inequality is also due in part to the growing amount of “income” that comes from investments. It is hard to argue that one’s investments are made with the greater good in mind and not one’s self-interest. These difficult arguments are why we need that think tank. I’d call it the Union of Radical Defenders of Political and Economic Stratification, or U-R-DoPES.