Dealing with inequality: are wealth and income caps the answer?

Inequality today, perhaps, draws more comment than poverty if only because extreme poverty has been successfully tackled in most parts of the world. There are many studies that document increases in inequality (notably the book by Thomas Picketty). Many of these findings are contested- some dispute the contention that inequality is rising. But the fact that there is substantial inequality is not disputed.

Now, we have two books that propose radical solutions. One wants a cap on wealth or savings of $ 10 million. Another argues that nobody should earn more than the current threshold for entering the top 1% of taxpayers ($330,000 in the US). The Economist argues that, whatever the theoretical arguments for limiting inequality, we do not have effective ways to place limits on income or wealth.

First, if we want to cap wealth  or income, it implies a 100% marginal income tax rate above a certain income. That is very difficult to enforce: there would be massive evasion or people would flee to friendlier tax regimes. And if all nations enforced such a marginal tax rate?  The effect on incentives would be devastating:

Imagine a world where any gain above £180,000 a year, or $10m over a lifetime, was forfeit. Highly productive people—such as surgeons and engineers, never mind word wizards like J.K. Rowling—would have no financial incentive to keep working after that point was passed. Perhaps some would carry on toiling out of altruism or for the love of the job. But many would be tempted to kick back, relax and deprive the world of their exceptional skills, drive and imagination.

Consider, too, the incentives such a system would create for entrepreneurs. You have an idea for a better mousetrap. Under the old system, you might mortgage your house to raise cash to build a mousetrap factory, in the hope of making a fortune. Under the new system, you must shoulder the same risks (such as losing your home), for a small fraction of the rewards.

Potentially big ideas would stay small. Even if your mousetrap is so good that the world might reasonably be expected to beat a path to your door, it would be irrational to borrow money to expand production. The financial risks of trying to build a global business fall on you. The rewards go to someone else. Only a mug would take such a bet.

Well, it's important that we steer clear of extreme solutions to inequality. Wherever inequality is rising, we need to fix a few things that Joseph Stiglitz has emphasised several times: the bargaining power of workers, the power of corporations and the way the elite frames rules to suit itself. People will accept even a high level of inequality in society provided they see a certain fairness to it. At the moment, it all seems like a game that is rigged by the rich and the powerful.