Steven Pearlstein, who usually has a tepid, establishment take on things, sounds kind of shrill, even, perhaps, liberal when he talks about income inequality. Pearlstein does a good job of laying out the facts of inequality (and how it's become worse), but it's the implications of inequality that are worth citing (italics mine):
Concentrating so much income in a relatively small number of households has also led to trillions of dollars being spent and invested in ways that were spectacularly unproductive. In recent decades, the rich have used their winnings to bid up the prices of artwork and fancy cars, the tuition at prestigious private schools and universities, the services of celebrity hairdressers and interior decorators, and real estate in fashionable enclaves from Park City to Park Avenue. And what wasn't misspent was largely misinvested in hedge funds and private equity vehicles that played a pivotal role in inflating a series of speculative financial bubbles, from the junk bond bubble of the '80s to the tech and telecom bubble of the '90s to the credit bubble of the past decade.
As Pearlstein notes, income inequality bids up prices of inelastic goods, and thereby diminishes the quality of life for people lower down on the economic totem pole.
I've discussed how income inequality drove the massive increase in college tuition before, so I won't rehash it here. But Pearlstein bumps into a point that typically isn't raised about progressive taxes. They don't really help the middle-class and lower-middle class that much (keep in mind that the median income in the U.S. is around $50,000). Most proposed progressive tax schemes wouldn't really narrow the gap between someone who makes $50,000 per year and someone who makes $100,000.
Where the after-taxes income gap really would narrow would be between high income families, such as between one that makes $150,000 annually versus $350,000. Likewise, the couple facing 'hardship' at $450,000 per year--and who wants to live as if they earned $1 million--would be, after a more progressive tax, a lot closer in income, and therefore, lifestyle to the millionaire if there were a more progressive income tax.
Yet these are the groups that most vehemently oppose a significant increase in the upper tax brackets, never mind the paltry one Obama is pushing. I guess it just goes to show that rich people can be fucking morons too.
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I've suspected for a long time that one of the reasons people oppose high-income taxation is aspirational. Even if they themselves would be better off with higher rates at the top, they want to think of themselves as being or potentially becoming the sort of people who would suffer. After all, don't you want to think of yourself as successful? And it's easy for the true beneficiaries of keeping the taxes lower to play up those fears by harping on at concerns about wealth redistribution, which is something that drives most people into panic-mode.
I'm not completely sold by your argument. To the extent that those with good incomes are interested in positional goods, such as artwork and spots in prestigious schools, then the top quintile might benefit relative to the top 1% from a progressive tax that more levels the playing field. But to the extent that their interests lies more to non-positional goods, such as a remodel of their kitchen, weekends at a spa, a large-screen HDTV, or tuition at the local public university, they are better simply by retaining more of their income.
My own view is that I don't want the US to start looking like a banana republic. No matter what I earn or how high my net worth goes, I want to feel and live as part of a community, that includes people poorer and richer, without the need for walls and gates to keep me safe. That isn't an economic good at all, but a social desire.
Russell, the argument you are making applies quite well with the middle 3/5 or so of the population. These are the people who aspire to the things you mention. Every income group aspires to the lifestyle of people with somewhat higher incomes. (That's why the infamous Prof. Henderson considers himself poor despite his estimated >$400k annual income.) You can argue over where the exact crossover point is, but by the time you get into the top 5% or so you are looking at what you call positional goods. (Long before that, in the case of housing; living in the most desirable neighborhood, or at least the most desirable zip code, is something everybody wants.) It's the people in the next tier down (the 80 to 94 percentile range) who are generally thought of as the upper middle class. Mike (and Steve Perlstein) are correct that this is the group that benefits the most from progressive taxation, since these are the people who would like to compete for positional goods but often cannot afford to do so.
Also, not wanting to live in a banana republic is an economic good. In a banana republic (or a country either in danger of becoming one or with recent experience of having been one), if you're the upper class, then you have to spend money on personal security, which is not at all productive. If you're anybody else, then you have no guarantee that you can keep anything you earn, so you become less productive on "why bother" grounds. One of the things that struck me about Brazil was the tendency of anybody who could afford to do so to live in a gated compound--and Brazil is one of Latin America's better run countries (and I was in Manaus, which has much lower crime rates than Rio or São Paolo). That's because Brazilians, like many other people, have living memory of military dictatorships and oligarchs who take as much as they can as fast as they can. The US (especially Florida, but increasingly so in the other sand states, and the rest of the country is at risk) is headed down that path. The gangs in both countries imitate the oligarchs.