More on the Primary and Secondary Income Distributions

December 7th, 2011 at 8:48 am

A few more thoughts re these recent posts regarding the relationship between the primary distribution (market outcomes) and the secondary (i.e., after taxes and transfers).

I asserted that while we must ensure that taxes and transfers are pushing back against the wave of higher inequality, you can’t restructure market outcomes through redistributive fiscal policy.  You can offset them; you can’t fundamentally change them.  And, if you don’t attack the root problem, you’re going to have to ratchet up the redistributive function every year, a Herculean lift.

That said, a number of commenters made the good point that tax policies create feedback between the primary and secondary distribution.  Much higher tax rates at the top of the income scale are certainly associated with periods of less pretax inequality as shown here and there is a theory, with some evidence, that very high marginal rates discouraged obscenely high salaries.

There’s something to this, but a) much higher tax rates are not in our future, and b) the fact that we privilege different types of income through the tax code, like capital gains and dividends, means that you’d have to fix that first, or you’ll just have a lot of shifting stuff around (what was earnings will become something else, taxed at a lower rate).  In fact, ending these preferences for one type of income over another would be a great policy advance, ending big distortions and raising more much-needed revenue.

BTW, conservatives argue that transfers through the safety net–welfare benefits, unemployment insurance–have pernicious effects on the primary distribution by discouraging work.  Somehow, you give the poor and unemployed some help and they work less*; you give the rich a bunch of phat tax cuts and they work harder.   Go figure.

*Robert Moffitt et al do good work on this question–see here re low-income programs, e.g., and here for lack of advertised response of the wealthy to tax changes (i.e., the rich do not massively respond to tax changes, as the current tax debate would have you believe; neither do the poor stop working when they get a boost from the safety net).


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10 comments in reply to "More on the Primary and Secondary Income Distributions"

  1. D. C. Sessions says:

    It’s not that more assistance to the working poor causes them to work less, it’s just that more assistance to the working poor makes it possible to pay them less.

    Which, if you’re of a conservative mind, translates “working for less money” into “working less.”

  2. PeonInChief says:

    That’s because the rich are inherently industrious, virtuous and responsible, while the rest of us–the trailer trash–are inherently lazy, vile and irresponsible, and would immediately quit working, loll about on the sofa eating fast food and watching Jerry Springer, and leave dirty dishes in the sink.

  3. Tom says:

    If you think about the effect of very high incomes on incentives, consider that someone who get $10 million in one year pretty much never has to work again (10 million * (0.5 after taxes) * (0.04 per year) = 200000 per year). In addition to reducing incentive to work, it can change high level managers behavior with respect to risk.

  4. Horace S Rockwood III, Ph.D. says:

    Prometheus stole fire from the gods and gave it to man. His punishment was to be lashed to a rock while an eagle ate his liver every day. Every night, however, the liver regrew.

    You mean either Sisyphus, who pushed a huge rock up a slope each day, only to find it rolled back down during the night, or Hercules (see “Herculean”) who did the heavy lifting successfully.

    I am regularly impressed by your columns but frequently frustrated by spelling or grammatical errors (see para 2 of previous post: “fundamentally change” I assume you don’t want to sound like a sports announcer why doesn’t understand adverbs). Perhaps you don’t care on your blog, but you could use a good copy editor. I’m a retired English professor and would volunteer to make suggestions if you’d like.

    • Jared Bernstein says:

      Sorry–sometimes speed trumps adverbial accuracy. I’m tryin’ to move a lot of product here!

      • Greg says:

        It’s good product even with the random typos. Thanks for this Primary and Secondary Income post. Very helpful.

        • Jared Bernstein says:

          Sometimes I put the typos in there on purpose just to keep it real! I’ll leave it to you to figure out which ones are planted.

  5. pjr says:

    I tend to dislike government efforts to transfer money from the wealthy to the not-so-wealthy with one huge exception: the provision of services that the government can provide and voters strongly desire. Beyond traditional infrastructure, the key examples today are education and health care, the costs of which LITERALLY are bankrupting working- and middle-class Americans.

  6. Geoff says:

    There is a series of 10 articles at Slate called ‘The United States of Inequality’, written by Timothy Noah.

    The link to the first section: