2008-01-01

how wealth redistribution can actually work

Working in finance, I've met a bunch of rich people. Absurd amounts of money are made on Wall Street, and the work done for it, while it can be hard work, is certainly not proportionally hard. Many of the (relatively) rich people I know recognize this and are fairly warm to the idea of sharing with others. However, some (including myself) are turned off by the system we have today. Here are some observations as to why the current thing doesn't appeal much and an idea for what might work better.



In many cases, a significant part of financial success is pure luck. Land a job with the right company, choose to work in an industry just before it takes off, or even just have the right contacts---in many ways going out and trying to make money is like rolling the dice. Understanding this is one reason folks with money are not averse to the idea of giving some of it to help others.

And traditional charitable giving may not be enough. It's easy to imagine problems out there that money could help resolve, but that can't advertise themselves very well. Thus generally helping everyone (with some sort of "safety net") might make sense. (It also might not--there are reasonable arguments on the other side here as well and I'm not sure whether I agree but for the sake of argument let's say it makes some sense.)

Given that people are on board with helping each other in a general way via wealth redistribution, what's with all the controversy over welfare programs? I speculate that they're broken in these ways, all of which stem from the complication and specificity of the laws and regulations:


  • Corruption. It's not the poor people who need the help that are cheating and squandering the help, it's sick people in positions of power, such as lower-level unaccountable career bureaucrats. Regardless of the true level of corruption, the perception will be that there's an unacceptable amount of it so long as the system is highly complicated.

  • Mis-allocation. The wrong people are receiving the help, and many who need help aren't getting it. Further, those that are getting some help are getting the wrong help (e.g. food stamps when they need health care).

  • Condescension. When there are special categories of people who get welfare help, it marginalizes those people and also damages self-confidence: if you meet the standards for needing welfare help then you must be inferior to those that don't need help. Furthermore, with for example food stamps, someone in government is telling you that you're not smart enough to decide for yourself what you need most. (You still can't get nutritional supplements with food stamps.)

  • Inverted incentives. I was walking home from work the other day and overheard a conversation where a young woman was describing her experience moving from unemployment where she "had no trouble paying [her] bills" to a job where she can barely make ends meet. If you're better off financially not working, then why not stay that way?



My theory is that all of these problems can be done away with by simply admitting that what we're after is actually wealth redistribution, and that we're okay with that. We're admitting that capitalism is not perfect as far as allocating resources on the human level, and we're giving it a small amount of help. We're also acknowledging that part of the reason for this program is that we don't know what everyone needs, thus they must be given the opportunity to decide for themselves. My alternative proposal would then be straight-forward:

Tax everyone an equal percentage, then redistribute that wealth as an equal dollar amount paid to everyone.


Any healing abides by ahimsa (non-harming)---otherwise, it's not healing, just pushing the problem around. The above proposal would do less harm than the current system: There's no invasive, degrading label of who needs help and who doesn't. There's no bureaucrat deciding what qualifies as food. There's less room for corruption because the numbers are so simple that any inefficiency in redistributing the wealth would be transparent. Finally, if you decide to go to work, the money you earn adds to your welfare income instead of replacing it.

A couple of important details to add: the taxation would be less harmful if it were through a consumption tax instead of the income tax. The income tax is inefficient, is ridden with loopholes, dis-incentivizes working to earn income, and invades privacy. As far as paying out the wealth--a simple monthly check from the treasury would do fine. The FairTax, which I support, takes the first step in the right direction.

Still to come: numbers.

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