Income cap may help reduce inequality

BY MARK BUCHANAN

AUGUST 12


Concern about rising wealth and income inequality has generated all kinds of solutions, often focused on improving the lot of the people at the bottom with measures such as minimum wages. But instead of putting a floor on what people get, why not put a ceiling on how much they get to keep?

The idea of a cap on income sounds crazy and most economists find it unthinkable — as evidenced by the cries of incredulity Oxford professor Simon Wren-Lewis recently elicited when he brought up the idea in an academic discussion. The obvious response is that anything of the kind would automatically kill economic creativity by destroying the wealth incentive that drives entrepreneurs to start new businesses.

But is this really true? Or does this way of thinking merely lack imagination? Maybe there is a clever way to design an income cap that would not deter business at all.

One idea comes, unexpectedly, from Mr Tony Hawks, a British comedian and writer. He is best known for the bestseller Round Ireland With A Fridge, a recounting of his effort to win a £100 (S$210) drunken bet by hitchhiking around the circumference of Ireland with a medium-sized refrigerator (he did it). He later wrote another book, Playing The Moldovans At Tennis, about his quest to track down, play and beat each of the members of the Moldovan football team one-on-one at tennis (he did that, too).

The poverty Mr Hawks encountered in Moldova, though, made him rethink the value of the wealth and fame he had achieved. He decided to donate 50 per cent of the royalties from his second book to a trust fund for beneficial projects in the country. A few years later, after the money had paid for a new care centre in Chisinau for children with cerebral palsy, Mr Hawks had an epiphany.

“I met the children and their parents, saw their smiles,” he recalled. “And the experience really enriched my life. I now actually feel good about myself. Undoubtedly, I feel happier since I did this.”

Mr Hawks’ realisation that doing good could prove far more valuable to him than the foregone 50 per cent of his royalties led to an idea: An income cap that would apply to money, but not to wealth in the broadest sense.

MAKING PEOPLE COMPETE TO DO GOOD

Suppose that people, after paying ordinary income taxes, would be allowed to keep up to, say, US$500,000 (S$625,000) of their income. They would then be obliged to give away the rest to charities of their choice — or, if they like, to a charity of their own design and creation.

Such a policy would encourage a rapid proliferation of philanthropic organisations competing to attract the money — much like the amassing of financial wealth has fuelled the money-management industry. More people would be able to find jobs doing good things and society would benefit from their efforts and resources.

The wealthy, too, would benefit. Many studies have shown that the more money one has, the less happiness one derives from each added dollar of income. This may explain why many of the super-wealthy, such as Mr Warren Buffett and Mr Bill Gates, ultimately turn to philanthropy — making yet more money matters little to them in comparison with what they can get back by helping others.

With Mr Hawks’ income cap policy, the wealthy would end up competing not only to earn the most money, but also to outdo others in making wise and useful gifts to the best charities, or to start and manage charities reflecting their values. A virtuous circle would be created. The philanthropic activity generated by such a policy might significantly decrease the need for many taxpayer-funded government programmes, reducing the need for income taxes.

The idea actually resonates quite well with the spirit of capitalism. Huge taxes on the rich do not work: They naturally breed resentment and stifle creativity. Governments are often very bad at redistributing the money efficiently. Besides, people should not be punished for working hard and being successful. They should be rewarded and encouraged.

People care about more than money and our policies should harness this fact in a smart way. Mr Hawks has at least the nub of a very good idea. It might not be the ultimate answer, but it has the seeds of something very clever in it. We need to work harder at imagining what might be possible with policies that encourage the better parts of human nature, rather than merely channelling people towards gaining as much wealth as possible.

As a result, they might be happier.

Bloomberg

ABOUT THE AUTHOR:

Mark Buchanan, a physicist, is the author of the book Forecast: What Physics, Meteorology and the Natural Sciences Can Teach Us About Economics.