The solution to income inequality lies in recognizing that the root cause is not the uneven distribution of incomes. Philosophers have known it for millennia, and economists for at least 100 years.
The anguish comes from a human and emotional phenomenon: people comparing themselves to others. (There’s an important related cause, which I’ll describe in a moment.)
Across all income distributions, it is not the absolute amount but rather the relative amount that drives perceptions of fairness or inequality:
- Move a person making $500,000 a year into a neighborhood where her neighbors all make $1 million or more, and she will feel miserable.
- Take a person eking out a living on public assistance, and their benefits will seem generous to the colleague who’s seen theirs cut because they failed to satisfy the job search requirements.
The solution is to give people more favorable comparisons. Call it the Quintile Switch.
The Quintile Switch
Here’s how it would work:
- Households in the bottom quintile of a country’s income would be given the option to move to a country where their income would put them in the top quintile.
The home country would fund the transfer for the first year. They are already paying for it because individuals in the bottom quintile are significant net recipients of government transfers.
In the United States, households earning less than $28,000 are in the bottom quintile. This amount would put you comfortably in the top quintile in most of the rest of the world — China, India, Africa, and South America.
Unhappy about your income because you feel poor in the U.S.? Try a year in India or Africa where you are among the elite.
This would work for all Western economies. Even among developing economies, if you are in the mid-tier of growth, there is still plenty of room below you.
Important supplemental rules:
- Although it starts as optional, the move becomes mandatory for any person who complains more than twice about income inequality. This includes all economists regardless of their earnings.
- Persons in the top quintile who say income taxes should be higher would immediately become subject to a 55% federal tax rate on all income to see what it’s like in Japan, Austria, or Denmark.
- Further, persons in the top quintile who complain about income inequality would lose the deduction on their charitable contributions.
- All of Warren Buffet’s charitable contributions would be reversed and his entire fortune made available to fund the Quintile Switch. (He’s already on record saying income taxes should be higher and fortunes subject to an estate tax.)
Why Not Just Redistribute Income?
That’s because redistributing income does not solve the underlying problem (people are unhappy that others have more than them) and creates new problems.
Most significantly, redistributing income distorts incentives for both those receiving it and those from whom it is taken.
- Persons receiving free income have no incentive to work.
- Persons who have “excess” income taken from them have no incentive to earn additional income.
Both dynamics quickly hollow out a country’s economic substance. Each year the median income declines, leading to permanently lower living standards.
What Would the Quintile Switch Accomplish?
The Quintile Switch gets to the root cause of the problem, which is people comparing themselves unfavorably to others.
- When you are in the bottom 20%, you feel unfairly treated.
- When you are in the top 20%, you know you’ve earned it, and others are just lazy whiners.
Taking a person from their relatively poor existence to a relatively rich one, on the exact same income, solves another of the root causes of concern over income inequality: being sad about what you don’t have rather than happy for what you have.
More people would be made happy by virtue of being in the top 20% than they would by virtue of receiving twice as much money while remaining below the median.
If our goal is to make more people happy and not just stick it to rich people, the Quintile Switch is a far superior solution.
What Do The Host Countries Have to Gain?
That’s easy. The host countries are getting an influx of relatively wealthy people who only seem poor in their home countries. Thus, it would be a boon to their economies.
And if their bottom 20% expands a bit as a result, then they can offer the Quintile Switch to their citizens.
Although this started as a thought experiment, I propose it now seriously.
Would it work? If you think not, why not?
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I published a version of this article on Medium originally.