The Problem of Unearned Income

Humanistic Business Management as it applies to tax policy.

I subscribe to the Evonomics Blog. And if you don’t, you should.  Joseph E. Stiglitz, winner of the Nobel Memorial Prize in economics, has a great essay on how unearned incomes are killing the economy -

The gist of it is this. Income inequality is bad for the economy. Capitalism is driven by demand. Demand comes from consumers and consumers are by and large workers otherwise known as people who make things.

The problem is that our tax policy rewards unearned income, meaning income that isn’t derived from making things, but income that is made just by pushing money around or receiving rents on things that other people have made. This rewarding of unearned income distorts the economy and takes money away from projects that actually make things and gives it to people who provide no real value.

Now I realize that people in banking will argue that they do create value. But they really don’t. All they are doing is facilitating the creation of things and sometimes, they aren’t even doing that.

There is an assumption that the people who are the most rewarded contribute the most. But that’s an assumption and it isn’t always true. This is the lie behind trickle down economics. And it is a lie. If you give more money to the people at the top, it does not create more jobs or better paying jobs. What creates more jobs is demand.

If you are interested in this as a policy issue area, read the article. It is dense but totally worth reading.

Inequality causes instability. 

The bottom of this essay contains a lot of policy proposals that are about how to reduce inequality and they range from investments in education, to changing the tax code by redefining what economic performance means.  If you are concerned about the health of the economy – this is an essay worth reading.

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