Dr. Perry is Assistant Professor of Economics at Jacksonville University and Director of the Center for World Capitalism of the James Madison Institute.
Many people deplore the fact that the top 20 percent of U.S. households account for 55 percent of the nation’s after-tax income, and the top one percent own nearly 40 percent of the country’s wealth. Such inequality seems to offend some sense of justice and fairness and this prompts policies to tax the rich and redistribute income to people on the bottom. The very nature of the U.S. progressive income tax is intended to tax the rich at increasingly higher rates to achieve a more “equitable” distribution of income.
In discussions on equality, we often do not define our terms well. Most of us would agree that equality of opportunity is desirable. But, equality of opportunity in no way guarantees that outcomes will be equal. In fact, inequality of outcomes is the natural and expected result of any fair, competitive process, whether the competition is for Olympic medals, Nobel Prizes, grades, or dollars.
For example, in the 1992 summer Olympic games, almost 100 countries competed in over 230 individual and team events in 26 different sports. In all, 815 gold, silver, and bronze medals were awarded. The countries that received the most medals represented only ten percent of the total number of countries that competed. Yet that top ten percent won more than 65 percent of the total medals awarded. The top 20 percent of the countries won more than 85 percent of the total medals awarded.
An analysis of Nobel Prizes awarded in the four science categories—physics, chemistry, medicine, and economic science—also shows a dramatic inequality of outcome. Since 1901 there have been 447 Nobel Prizes awarded to individuals from over 30 countries. Three countries (United States, Great Britain, and Germany) earned almost 300 Nobel awards. In other words, the top 10 percent of the countries receiving awards got 67 percent of the total Nobel Prizes. The top 20 percent (United States, England, Germany, France, Sweden, and Switzerland) earned over 80 percent of the total prizes granted.
As long as everyone is free to compete in a fair contest with well-defined rules, no one is offended by the inequality of outcomes at the Olympics or in Nobel Prize competition. No one ever seriously suggests that Olympic medals or Nobel Prizes (with the possible exception of the prize for literature and peace) be redistributed to achieve “equality of outcome.”
Why then do people object to an unequal distribution of income or wealth? The results of income distribution conform very closely to the inequalities outlined above in the Olympics and for Nobel Prizes. An unequal distribution of income is a natural and expected outcome—just like the unequal distribution of Olympic medals or Nobel Prizes. The economy is a competitive marketplace and there will always be people who excel in business, science, or the arts. Through some combination of skill, perseverance, hard work, and luck, successful people like Bill Gates, Oprah Winfrey, and Michael Jordan make more in a year than most of us make in a lifetime. But then the United States usually wins more Nobel Prizes in a year than Japan has won all century.
Taxing the most successful people in our society and redistributing income to the most unproductive members of society is not a solution to the so-called evils of income inequality. Redistribution through a punitive, progressive tax system harms everyone—it makes the richest, most successful people less productive and the least productive people even less productive. In the same way that redistributing Olympic medals would weaken and undermine athletic competition, income redistribution weakens our economic system.
The medal winners of the Olympics and the Nobel Prize winners are honored, respected, and admired. We should pay the same respect to the winners and true heroes of the free enterprise system—the successful business people at the top of the economic ladder.