The Value Of Income Redistribution Is Theoretical

I happened to catch a television show “Justice with Professor Michael Sandel” on iChannel.  It dealt with social justice and the work of American moral philosopher John Rawls.  Good show, but it troubles me.

Rawls proposed that society is organized in ways that benefit some but not all.  People that do the best are typically from families that have done well, are the first born, or live in wealthy countries.  The system supports them.  Not necessarily more, but it is easier for them to plug in.

Since they have fundamental advantages, not of their own doing, then they have no clear entitlement to the complete value of what they earn.  Effort alone is not enough.

Society as a whole contributes in some indirect way and should be rewarded for that contribution.  Rawls proposes income redistribution from those that have more to those who have less.

Essentially should the value of their natural advantage accrue to them alone, or should they share that with society as a whole? If so, how much?

I have no dispute with the idea that society contributes to the success of the wealthy, that it costs to operate society as we know it, and that wealthier people should contribute more to that cost.  I might quibble about whether or not income redistribution is the complete answer and certainly would argue the quantum and method of distribution.

Rawls reasonable proposal holds four blemishes.  They must be addressed in order  to do redistribution so that society, taken as a whole, is better off.  Missing the “as a whole” requirement means the end would be an equal sharing of poverty.

There are flawed implicit assumptions:

  1. Rawls assumes the wealth to redistribute will always be there and it will grow.  Many who champion the redistribution cause have limited awareness of the things, other than money, that must be invested to acquire high income or great wealth.  Incentivization is a difficult part of the problem and seldom addressed.
  2. Rawls assumes the persons on top will willingly go along with such a scheme and will not avoid the rate by recharacterizing their income or wealth.  Arthur Laffer has pointed out that if the tax rate goes up then the base to which it applies will shrink.  Distributing wealth to tax lawyers to create such methods is not part of Rawls theorem.
  3. Rawls fails to address the fact that the people at the bottom who receive the redistribution are not always making their maximal contribution to society.  Without their good faith effort, society loses the value of what they could have contributed.  There is a moral hazard to a system that permits sub-optimal contribution.
  4. Rawls assumes that governments operating in a top down mode can do better than the market working in a bottom up mode.  History supplies examples to deny that assumption.

I believe that people, all people, want to do their best and be their best, and that each of us has impediments to doing so.

I further estimate that people who hold delusional beliefs invariably fail.

Lastly I believe that governments get in the way of successful achievement because they are impatient.

Impatience is the mark of the unsophisticated.  Some problems take time to resolve.  Some go away on their own.  If the temperature at home is 15 Celsius and I want 20, turning the thermostat up to 25 will not make it warm faster.  So it is with regulation and standards.  Rigorous mandates have little effect in the short term, but politicians need immediate results so they tend to overdue their solutions.

Education, another patience issue, is key for the disadvantaged.  Not only the traditional education material, but it must also include practical education, a way of life idea.  Things like:

  • There is no free lunch.
  • Unearned esteem is a trap.
  • The time value of money idea.
  • Adversarial behaviour creates little more than adversaries.
  • Why Judge Judy makes 200 times more money in a year than a supreme court justice.
  • How long term goals include the question, “What must I do today?”

Education should include “strategic financial literacy” and it should further include some kind of “life literacy.” 

Ideas that cannot be implemented or that reduce the overall total wealth of society should be discouraged.

Meaning well is not a sufficient condition.

Contact: don@moneyfyi.com  

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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