How Much Income Inequality Is Too Much?

Most people would agree that perfect inequality would not work because it would affect an essential incentive system.  Therefore, some inequality is socially desirable, but there are debates about where to draw the line.  This article provides some ideas on how we might think about how to draw the line.

Societies determine the manner is which benefits are assigned to individuals.  John Rawls argues that the assignment of higher benefits to some individuals is fair when doing so benefits all individuals.  Most believe that we could lower the income of the top 1%, and increase benefits to the bottom 40% and also increase total social welfare. They would conclude that current inequalities are too high.  The rapid increase in incomes going to the top 1% in recent years has raised concerns that higher levels of inequality might even be damaging.

Joe Stiglitz has written about the damages of growing inequality. Implicit in this argument is that the growth of inequality violates an implicit social contract.  It has led to a decline in social mobility and opportunity.  This leads to alienation and a loss of social cohesion and stability.  In a sense the bottom 40% give up on society as it presently exists. It would also lead to a decline in productivity if the bottom 40% lost their incentives to develop knowledge and skills that benefited society.  It would also increase the costs to society for dealing with criminal behavior, violence and other consequences of lower levels of social mobility.

Others have looked at the relationship between health and income.  A market system for healthcare implies that those with higher incomes would be healthier than those with lower incomes.  Some nations have dealt with that issue be using a variety of methods to reduce the relationship between healthcare and income.  In the US, this has become an extremely important issue because it has an inefficient healthcare system.  It  relies on the market system to determine the prices paid to healthcare providers, and it has a very inefficient payment system that forces healthcare providers to deal with a large of number of insurance providers. This leads to a very expensive system that excludes millions of citizens from adequate healthcare.

Within economics, which has a long history of dependence on utilitarian philosophy, it is fairly clear that the marginal benefit that the bottom 40% would receive from a unit of higher income would be greater than the marginal benefit of a unit of income that went to the top 1%.  Therefore, many economists use the utilitarian argument to argue against growing income inequality.  That is also why they support a progressive tax system that is based upon the ability to pay theory.  In the US the tax system has been made less progressive over the last 40 years. Economists who adhere to utilitarian principles would like to restore the progressiveness of the tax system.  Unfortunately, income inequality also leads to greater political inequality.  The top 1% has used its political power to make the tax system less progressive and it has also used its political power reduce the effectiveness of government programs to redistribute income.

This is a good sample of thinking about the how to draw the line on income inequality. A combination of these ideas provides a good start for those who are interested in the problem of growing income inequality.