My case for ignoring income inequality brought several thoughtful rebuttals. The best of these focused on human beings’ undeniable desire for status.
The argument goes something like this: even if everyone has greater access to material goods and services, differences in people’s access to these goods and services still matters because each of us cares about his relative standing among others.
Suppose, for example, that in year one my real income is $50,000, same as Jones’s. In America today, this is no princely sum, but it’s more than enough to keep each of us far out of absolute poverty.
Now suppose that at the end of year two my real income has risen to $55,000 but Jones’s has shot up to $60,000. I’m worse off in a very real way – in a way that matters deeply to me. My subjective assessment of my situation at the end of year two might well be that I’m worse off than I was when Jones and I each earned an income of $50,000 (even though this amount is $5,000 less than I earn in year two).
The reason for my distress isn’t envy; it’s my lower status. In year one I was Jones’s equal; in year two, his status is higher than mine. I suffer. Most importantly for me as a male with a healthy sexual appetite, my chances of attracting desirable women to my bed are lower in year two than they were in year one.
What do all the leather-trimmed cars, vaulted foyer ceilings, and iPods matter if I can’t entice beautiful babes to sleep with me? What do I care if I can afford to eat more Chilean sea bass and drink finer wines if I’m looked upon by everyone other than my mother as a nondescript nobody?
Ultimatly, my relative status — not my absolute level of income — will determine my access to the acclaim of others and (most importantly) my access to young, attractive women.
I have no doubt that people care deeply about their status relative to others. And I have no doubt that higher relative income is one determinant and signal of higher status.
But why focus so obsessively on monetary income (or wealth) as the determinant of status?
Suppose a policy tool were available that would keep all sports and rock stars from earning incomes above that of the average factory worker. Would implementing this policy keep the social status of Shaquille O’Neal and Paul McCartney equal to that of the average factory worker?
My guess is that Shaq and Sir Paul would continue to enjoy more acclaim and access to beautiful babes – in general, more status – than would any factory worker who earns just as many $$$ as they do.
So, on one hand, if my guess is right, the status-based case for redistributive taxation to equalize incomes is weakened. The status problem isn’t necessarily reduced just because post-tax $$$ are more equally distributed across the population.
On the other hand, though, if my guess is right, then one element of the case against redistributive taxation is weakened. To the extent that rewards from productive activity come in the form of higher status, then taking from the likes of Shaq, Paul McCartney, and Brad Pitt some, or even much, of the $$$ they earn in their high-status jobs would do less to dampen their incentives to do these jobs well than if their sole motivation were to consume as many goods and services as possible. (The economic and moral case against redistributive income taxation has other elements that are unaffected by correctness of my guess.)
Most generally, precisely because people do care so very deeply about status, it’s naive to suppose that eliminating income or wealth as a means of establishing or signaling higher status will equalize status. Competition for status will be diverted from income-getting efforts into other efforts.
Would these other non-income-earning efforts to secure high status be as productive to society as are efforts to secure high status by earning high incomes?