January 2019 not only brought the start of spring semester at the college with renewed expressions of hope by our student-scholars, it also marked the seating of a new Congress. This latter event brought a vocal minority of newly elected representatives to the House of Representatives who have a unique view of economics and economic success. First, they are calling for a new top marginal tax rate of 70 percent. Next, they cite the existence billionaires as an indicator of the immorality of the economic system.
I will not waste your time explaining that a 70 percent marginal tax rate destroys the incentive to do anything productive. If this is not, as a professor of mine would say, ‘intuitively obvious to the casual observer,’ then any explanation I could offer would do no good. I would, however, like to talk about bit about economics and morality.
As framed by the new politicians, my discussion will center around income inequality and social mobility. In recent years, the top income quartile (top 20 percent) earned 24 percent of personal income. This is up from 22 percent of personal income not that many years ago. Thus, income inequality is growing in the United States.
Social mobility refers to the probability that our children, when adults, will be in a higher income quartile than us parents. This is to say: will our children will be better off than we are today? Recent studies suggest that there is a one in three chance that our children will end up in a higher income quartile. This percentage has not changed in the past 30 years.
So, in the end, income inequality has increased but social mobility is the same. What are we to glean from this?
The first thing one needs to recognize is that the distribution of income is an outcome. It is what it is. It is the result of economic activity and many other variables. It is simply like a report of facts by an auditor. Social mobility, however, is probably a policy variable. There are things that can be changed that will enhance social mobility. In fact, this is probably desirable as we all want our children to be better off than we are.
Let’s start with billionaires and immorality. First, I know of no evidence that points to billionaires being billionaires because they did something to the rest of us. This would be the case in a zero-sum world. However, we know that the world is not zero-sum. Billionaires became billionaires because they did something special for the rest of us. Their income status is the outcome of doing things for others. Is this immoral? Or is taking something away from them because they simply exist immoral? (You can’t answer me using your iPhone, Facebook, Instagram, etc. or if you are holding a Starbucks Coffee from one of the 30,000 stores.)
Studies also show that increases in social mobility result from increases in human capital. The source of human capital improvement for most of us comes from education and training. So, should we limit the success of others or should we create an educational system that benefits everyone and allows the success of others to provide an incentive for the rest of us?
Where is the immorality? Access to education by everyone is probably one of the hallmarks of the United States. Why don’t we invest in it and promote access for all, encourage institutional efficiency and use this as a sign of our morality? I’m just saying.
Dr. Skip Mounts is the Dean of the School of Business and Public Management at the College of Coastal Georgia. He is also a professor of economics and an associate of the Reg Murphy Center for Economic and Policy Studies.