How and How Not to Redistribute Wealth

I wasn’t nearly as outraged by Casey Mulligan’s Wall Street Journal op-ed characterizing the late recession as the “Redistribution Recession” as I expected to be:

There were new mortgage-assistance programs. People who owed more on their mortgage than their house was worth could have their mortgage payments set at a so-called affordable level—in government-speak, that means that you pay full price for your house only if you have a job and earn money.

There were new rules for consumer bankruptcy, with special emphasis on the amount that consumers were earning after their debts were cleared.

All of these programs have in common that they, like taxes, reduce incentives to work and earn. The cornerstone of “The Redistribution Recession” is to quantify the sum total of these incentives and their changes over time. That’s what I call the marginal tax rate, by which I mean the extra taxes paid, and subsidies forgone, as the result of working. Waves of new programs increased the typical marginal tax rate from 40% to 48% in two years.

There is a real demand for this kind of redistribution. Helping people who are unemployed or with low incomes is intrinsically valuable. We like doing it, and we like knowing that a system of help is there if we need it.

I have a great deal of sympathy with the redistribution of income. However, I have the old-fashioned idea that we should redistribute from the rich to the poor rather than from the rich and almost rich to other people who are rich or almost rich or, worse, redistribution from the poor to the rich or almost rich which together form the bulk of the redistribution we have today.

That’s always been one of the conundrums of indebtedness relief, for example. It would redistribute from one group of the rich and almost rich to a different group of the rich and almost rich.