incentivesWhat is the benefit of the super rich in an economy - what would be the effect of having a high capped income?
The wealthy benefit an economy in two ways:
These benefits give the wealthy a rather disproportionate impact on the economy. As one example, the wealthiest 1% contribute about 20-30% of all income tax and about 8-10% of all tax raised by the state (in the US, UK and EU).
This also means that volatility in the incomes of the super wealthy create equally disproportionate volatility in state earnings and tax revenue.
Capping the amount that the wealthy are allowed to earn removes all the benefits since it reduces not only the incentive but also the ability to invest. Taxes would, therefore, have to rise for all, economies would become less competitive (since economies of scale are removed) and the likelihood is that many of the these people would simply emigrate, taking their know-how with them.
India, by way of example, has already tried this (see License Raj). Believing in the Lump of Labour Fallacy, they limited the number of products companies could produce or export (bicycles were a favourite) so that, despite India's advantage in labour, they couldn't bring it to bare. This didn't stop the rich getting richer, but it certainly stopped the poor getting richer.
What happened is that China opened up faster than India and, by the time India started the process of legislative rationalisation, China's economy had already become the centre of mass production.
The impact of capping the earnings of the wealthy will end up hurting everyone else far more than it hurts the rich.
First, let's unpick the stock/flow confusion here. Wealth is stock. Income is flow. Income can be an indicator of net change in wealth.
The traditional view, within classical / Chicago- / Austrian- schools, that neither income nor wealth should be capped, because anything else would be economically inefficient, relied on the following two assumptions both being true:
But ...
Experiments in behavioural economics and psychology show that higher rewards do increase performance for unthinking repetitive manual labour; but for tasks requiring thinking, higher rewards decrease performance.
And a meta-analysis of results from health economics, criminology and social sciences, found that large wealth differentials make things worse for everyone - rich and poor.
If you lean towards Austrian thought, it would have all to do with incentive. If you had an income of 50 million pounds, and a business opportunity came by that may or may not be lucrative, then logic would say the individual would have no incentive to become “more” prosperous. Best case scenario, others would benefit from this decision. Worst case scenario, he or she would lose money. Some individuals may go for it, but taking into account human nature, it’d be a tough and unreliable one to model on a mathematical basis (which is also somewhat part of the Austrian doctrine.)
Edit: Adding to what I was saying, assume that the “business deal” is proportional to the 50 million GBP income. This means many jobs would potentially be created.
Aside from the more political impacts of very high incomes and the following high inequality in income distribution, one negativ impact is on private consumption: Typically, the savings rate increases with income, therefore, the higher the share of total income in an economy that goes to the “very wealthy”, the lower the average consumption rate in that economy.
One benefit is they are the ultimate Jones’s. By that I mean the super rich are a target where every person can hope to achieve. When was the last time you dreamed of all the money you would make working at Walmart or the Great Vacations you could take if you had a great job flipping burgers? You probably never have because we dont dream of being poor. The super rich set a goal that people try to achieve. There were not thousands of failed .com ventures because everyone felt like throwing their life savings away. They invested and tryed to join the elite.
I have never heard a successful entrepenuer who had a philosophy of I just want enough to get by. If you cap that the goal will be to reach that cap. We will no longer strive for greatest because good enough will be fine. Why have a company that employs 200k when I am going to hit my cap at 10K? The fact that would could maybe if we work hard and get lucky be there keeps us going. Most of us never even really take the risk but we almost all are looking out for that opportunity. A cap will reduce those opportunities because we do not land on the moon by limiting ourselves to those things that we know are possible.
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