The Palma ratio measures income inequality, comparing the world’s richest 10 percent with its poorest 40 percent. Economists at the Center for International Development have concluded that the middle 50 percent (i.e. the middle class) is stable across all countries surveyed, while the distance between the wealthiest and poorest grows.
According to the IMF, the United States has the world’s greatest nominal GDP, and its GDP per capita is ranked tenth. Of the 86 countries compared by the Palma ratio, the United States’ income equality ranks 44th, far below the other developed countries — no doubt it would rank lower had Scandinavian countries been included. Palma data reflects strong trends that the countries with greater income equality than the US have one of two common traits:
1. Countries in the Global North with more punitive progressive taxation rates
2. Countries in the Global South with lower GDP per capita
Further, the countries with less income equality than the US are all in the Global South.
Americans don’t handle not being the best well. But rather than immediately lament the US rank, one must consider whether more income equality is something worth having. Income inequality between the rich and the poor is a natural growth; social elites are the best-educated, most well-connected, and healthiest individuals in any society and are able to maintain these resources by “hoarding” opportunities.1 Income equality, however, can only be created through government policies designed to make everyone equal. Such policies have natural order all backwards — man ought to be equal under the law, despite being unequal of ability. When considering that the state’s proper function is to establish justice, it would seem that the only form of taxation which perfectly realises the universal virtue of justice is a flat rate. Unlike progressive taxation, the flat tax treats citizens as legal equals — whether taxes are low or high, in a just government, everyone pays the same share.
The United States’ Palma ranking is right where it should be*, and is indicative of the country’s uniqueness. The US features 132 companies on the 2013 Forbes Global 500 list, substantially more than any other country. The top five are rounded out by China (86), Japan (62), France (31), and Germany (29). The US is still a place where, by and large, the best have the greatest chance to succeed, in a way not present in countries with greater or less economic equality.
Living and studying in The Netherlands, I’ve observed a general complacency among the Dutch not found in The States. University tuition fees are heavily subsidised by the government, so Dutch students pay only €1,835 per year for tuition. Whereas the high cost of studies in the United States pressures American students to graduate on time or early, Dutch students, lacking a financial burden, have less urgency to do the same. To a greater extent, the tax system contributes to a complacent society — households annually earning upwards of €55,695 pay a 52% income tax rate. The Dutch welfare state provides such a breadth of services and taxes at such steep rates that it produces a largely unmotivated, hunger-less society. Dutch people know that they’re all going to come out approximately the same in life, so why should they work hard? That attitude is reflected in OECD data from 2011, which shows that the Dutch work fewer hours per week than anywhere else in the world, at 30.5. The system itself disincentivises innovation, as evidenced by the mere twelve Dutch companies among the Fortune Global 500.
“Whether they realise it or not, people want to be able to understand that there are people higher and lower than they are on the socioeconomic totem pole; those above them may motivate them to work harder in pursuit of their goals, and those below them may remind them that they could have it worse off. The need for hierarchical order is with us from birth. The basic unit of human social existence, the nuclear family, is a hierarchy, evidence enough that social status is not learned behaviour.”2
Social mobility, not income equality, is what we ought to value. However, it needs to be considered in relative, not absolute, terms. Absolute social mobility considers one’s income compared to his parents, whereas relative social mobility considers that, and also frames it within the gains of everyone else — a class rank, if you will. Absolute mobility can grow for everyone as the economy expands, and relative mobility is a zero-sum game — when someone climbs the ladder, someone else slides down a chute. This is often lost in the discussion, given the link between upward social mobility and the American Dream.
I know what it’s like to take the slide. In the late 1990s my father lost his job (justifiably) as an executive at a multi-billion dollar defence contractor and my life became a lot harder after that and my parents’ divorce. There were immediate impacts, like switching to public school and moving from a six-bedroom house to a townhouse, as well as future consequences, such as difficulty affording my undergraduate and graduate studies. Am I happy this happened to me? Of course not, although it has played a role in my character development. However, I recognise that it is important for members of the upper and upper-middle classes to backslide and thus make upward mobility possible.
“When it comes to the economic malaise facing America, the biggest problem is not the widening gap between rich and poor, but the stagnation of social mobility. When the income gap of one generation becomes an opportunity gap for the next, inequality hardens into social stratification.”3
– Richard V. Reeves, Brookings Institution
Regarding income inequality, the United States is between two undesirable extremes. China, whose wealth is disproportionately held by elites, has a largely poor population, and a GDP per capita ranked 87th, despite its nominal GDP ranking 2nd. At the other end of the spectrum, France has a relatively classless society because of punitive tax rates, which subvert the natural order of humanity, inhibit growth, extend state power, and create income-based legal distinctions among citizens. Aristotle’s doctrine of the mean, that the moderate choice between two vicious and opposite extremes is the most virtuous, indicates that the United States is right where it should be with regard to global income equality.
Although there is one supreme and perfect form of justice, it, like all universals, does admit of degrees. Justice in economic policy must prioritise outcomes over intent. Even though it does create legal distinctions among citizens, progressive taxation — that is, temperate progressive taxation — enables the greatest number of citizens to live comfortably. This utilitarian approach is not a Marxist attempt to bludgeon the wealthy and erase class existence, but straight from perhaps the greatest American to ever live. In a letter to James Madison, Thomas Jefferson suggested that a “means of silently lessening the inequality of property is to…tax the higher portions or property in geometrical progression as they rise”.4 Jefferson was concerned that without this variety of progressive rate, the political foundations of the Republic would be in jeopardy, as more and more wage labourers, dependent on proprietors with an egregious concentration of wealth, would have their political and economic autonomy eroded. In a state which (moderately) takes a greater share from some individuals than others, the legal distinctions among citizens are real, but are nominal when compared to the potentially deleterious effects of a flat tax.
Arguments for a flat national income tax based on theoretical appeals to justice can only amount to hypothetical posturing; no elected officials in a representative government would pursue such, whether because of held principles or concern for expediency. You want to lower taxes on the wealthy and raise them on everyone else? Good luck with that. Even if that did happen, the state’s noble intentions would foreseeably contradict my positions that A. social mobility is important (for an economy and a society), and B. that, in the United States’ case, the country is approximately where it should be with regard to income equality (and thus shouldn’t take drastic steps in either direction). If everyone in a given state pays a 25% annual income tax, that one-fourth of lost income does more to damage the quality of life for a wage-earner than a 33% rate would harm the well-being of someone north of the 90th income percentile. A high flat income tax would stagnate and calcify socioeconomic status, contributing to the “sticky floor” that renders upward mobility increasingly out of reach, the poorer one is.
Depending on your perspective on tax policy, either flat or progressive taxes could be seen as just. Here we find that policy which aims toward justice and has ends which justify the means. An appeal to temperance, as used to consider income equality, reveals that the most just form of income tax is a softly progressive one, and partakes more in moderation than in European practice.