The most common statistics being quoted revolve around the income and wealth of the upper 1%. This is, of course, good political rhetoric but poor analysis. The implication is that the '1%' are becoming wealthy through unfair circumstance; they are born wealthy; they were lucky; they got an unfair advantage; they cheated, etc. It is understandable that people don't want to think that the wealthy earned their wealth fairly. However, wealth inequality is primarily the result of the Pareto distribution, known more commonly as the 80-20 rule.
The distribution is named after Vilfredo Pareto, a 19th and 20th Century Polymath who found that 80% of Italian real estate was owned by 20% of Italians. However it proved to not be a trait of just the Italian economy. The Pareto distribution started popping up everywhere. For example, 80% of peas come from 20% of the pods. 80% of sales comes from 20% of the salespeople. In fact, a Pareto distribution is a hallmark of a statistically fair game.
It is widely published that the top 1% of Americans hold 40% of the wealth. What does Pareto say would be the result of a fair game? In this regard, .8³=51.2% and .2³=0.8%. 1% computes to 52.8%. In other words, a "fair game" could be expected to result in an even greater concentration of wealth and income than prevails today in virtually all of the developed world.. However, it should be recognized that it would be fair in a mathematical sense only. Social justice considerations would likely not consider it fair at all.
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Still, many, perhaps most, people are inclined to consider modern wealth inequality to be the result of a rigged game, while the facts don't really support that. Rather, as some wise people have noted, life is not fair. Pareto assures that there are relative winners and losers. This is partially because the modern Western society is based upon free enterprise, expressed through a 'dominance hierarchy'. However, primarily it is a simple result of income and wealth being earned by value added and Pareto applies to actual contributions.Free enterprise is extremely efficient, but it is heartless. As Pareto demonstrates, it tends to create a small percent of 'winners' at the expense of many 'losers'. Having said that, because at some level society is, and should be, viewed as a social contract, the notion that the value of labor is zero is counter to that proposition. If income varies consistent with a Pareto distribution, that is what it would be implying. In recognition of this practical reality that people won't work if they are not paid, we propose here an income model I=MW+P where MW is the value of productive effort in the form of a minimum wage, whether de jure or de facto, and P is The Pareto share that, calculated as P=I-MW, can be considered a recognition that those who add more value through above average competence, innovation, capital, etc. should be rewarded with greater purchasing power.
While nothing more than a recognition of how liberal democracies function, it places discussions of income inequality on more firm theoretical ground. In other words, while establishing MW or minimum wage is somewhat arbitrary, one can approach it analytically by subtracting the Pareto Distribution from the actual income distribution and the remainder is the aggregate MW which allows us to calculate a minimum wage. While precise, it fails on the basis of social justice. We prefer establishing a democratically arrived upon value for MW and then considering whether it is consistent with the computed P = Pareto and if not, consider why and what, if anything, we, as a society, should do about it.
We can make a philosophical statement about MW, such as, "Every full time worker should have the resources required to fund a dignified life". While it certainly sounds like an appropriate criterion, it still leaves plenty of room for interpretation and, therefore, disagreement. I happen to agree with it.
For example, one could find the rent for a marginal, but healthy, 3 BR apartment, divide it by 28% which is often cited as the qualifying income for housing. This would establish a minimum income for a married couple with two children. Suppose that rent is $1,200 per month. This would result in a calculated MW of $12.36 per hour with both parents working. This logic won't compel a consensus on a proper minimum wage. However, it should lead to an organized discussion amenable to objectively supportable positions.
The more technically supported measurement of income inequality is the GINI index which measures the deviation of the income distribution from perfectly equal distribution. The generally accepted position is that a high GINI, which indicates greater inequality of income, is intrinsically bad. However, it is a continuous function with no points of inflection. Therefore, while relative inequality is properly measured, there is little or no criteria for establishing a point of fairness or economic justness.
The free enterprise principle, with some modification, is that one's right to consume should be commensurate with the value one adds. This contrasts with the Marxist philosophy of "From each according to their ability, to each according to their need". The income model, herein proposed, is predicated upon the free enterprise principle and, as such, extremely high incomes are accommodated. In other words, if one creates 10,000,000 USD of value added, one should receive 10,000,000 USD in compensation, save for a potential reduction for MW, if the established value is more than the actual value added.
As we set a framework for considering what should be MW we can also consider a framework to replace ''the 1%'. There could be many ways to describe the wealthy. One could be to see whether a family can afford the cars of the rich. Husband drives a RR Wraith. Wife drives a Bentley GTC and they have a Escalade for a SUV. Per normal budget guidelines, a family needs about one million USD income to afford this fleet.
Neither the home cost calculation of minimum wage, nor the auto calculation for the definition of the wealthy should be taken as a serious argument for definitions. They are intended as simple examples of a basic logic. Most governments establish official poverty levels. However, these are not dignity levels and the two may not bear a consistent relationship to one another.
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By bifurcating household income into two distinct factors, minimum wage and pareto distributed free enterprise income, arguments over income inequality cannot be so easily conflated. One discussion would revolve around what constitutes a dignified life. Another conversation will revolve around any difference between the calculated and actual Pareto portion. These discussions will organize the issues but almost surely won't drive a consensus. However, differences in positions will then require more rigorous support..The MW+P model will also inform the discussions about taxation and social policy. There are three categories of citizens with regard to the model. They are
1) people who cannot achieve MW without community assistance. This could be because of disability or simply, based upon economic conditions, because they cannot compete successfully for existing job openings 2) The bulk of citizens who earn more than MW but less than the income defined as wealthyand 3) the wealthy, which, as likely defined, will constitute less than 1% but more than 0.1%.
It seems obvious that taxing group 1 would be fruitless. Taxes on the wealthy, most of whom are extremely mobile, must recognize that, if their taxes are too high, rather than raising revenue, it will result in the wealthy moving themselves and their businesses out of their current tax jurisdictions.
That leaves tax policy a matter of the rates and progressivity between 0% and the wealthy rate. This allows for sufficient latitude to facilitate robust disagreement but puts a practical upper limit on the revenue that can be raised via income tax. Reviewing the tax policies of developed countries suggests that the top tax rate that is supportable is around 35%
There is also plenty of room for disagreement on the degree and nature of group 1. One could argue that some members of group 1 should experience a lifestyle below the agreed upon level of a dignified lifestyle. The main argument would be that giving members MW would disincentive them from aspiring to moving into group two. However, in Western civilization, that may be a very unpopular position, and will not be articulated by any mainstream decision makers.
Some may argue that beyond a progressive tax at the bottom of group 2, the tax rate should be flat. Others may wish a heavily progressive tax. However, they are limited to the rate levied upon group 3.
Enlightened tax policy will result in an objective calculation of the tax rate for group 3. It is a calculation similar to the Laffer Curve. A low rate will generate low revenue. As the rate increases revenue will increase until the number of members of group 3 who leave the taxing authority will increase sufficiently to reduce total revenues.
