One thing that most people would agree on is that inequality is a problem. Especially in the United States where there is a great deal of inequality, I imagine it would be near consensus that our society would be better off with less inequality, all other things being equal.
Inequality exists on a wide variety of dimensions such as race, gender, sexuality, and religion. These social examples of inequality are generally agreed to be bad for society. Unfortunately, because they are social issues, it is difficult to design policy focused on correcting them.
In a liberal society, the government has little power to enforce social equality. This is not to say it is impossible, nor that policymakers shouldn’t work to correct these inequalities, but the levers policymakers have at their disposal to spur social change are few and far between.
However, policymakers do have very straightforward ways of reducing one type of inequality: income inequality.
A governing body that has the power to levy taxes could in a single bill completely exterminate income inequality. So, why doesn’t this happen anywhere?
The answer is because even though we might accept that income inequality is bad, we are willing to tolerate some amount of it when the benefits to society outweigh the negative impacts of income inequality.
It is true that our economy is set up to reward individuals who come up with ideas that people like. Jeff Bezos is a billionaire because people would rather have anything they want delivered to their doorstep than go to a store and buy it.
In a vacuum, the creation of Amazon seemed to have made society better, despite the fact that it increased income inequality. But what if we could do better? Really, what I am asking is this: are we currently allocating these resources optimally?
What if some of the money that goes to the highest earners was taken and given to those who don’t have enough to get by. This already happens to some extent via taxes and social safety net programs, but are we doing enough?
The answer to this question largely depends on an individual's preference. One way to think of reducing inequality like this is by imagining a leaky bucket (an image first presented by Arthur Okun). If we want to take income from one individual and move it to another, we need to do so with our leaky bucket (taxes). The more income we try to move, the more we expect to leak out of our bucket in the form of administrative overhead and more importantly, distortions to our economy.
This presents two interesting challenges for policymakers. How much income should we try to move with our leaky bucket, and what can we do to minimize the leak? Both of these are important questions, and both can directly be influenced by policy.
How much we should reduce income inequality really is a function of how leaky our bucket is. If policymakers are able to design efficient ways of reducing inequality, then bigger reductions of inequality could reduce losses for society. We could even see gains in the long run, as studies of the child tax credit suggest.
Even though it’s impossible to close the leak entirely, our society could still benefit from reduced inequality. At extremely high levels of income inequality like we have in the United States, we might not even notice leaks at a societal level at all.