Income Inequality, Taxation, and Redistribution

FTPortfolios – Brian Wesbury

One of our favorite economic parables is the Fish Story, from Paul Zane Pilzer’s 1990 book, “Unlimited Wealth.”  It is an excellent tool for thinking about wealth creation, inequality and redistribution.
 
Imagine 10 people live on an island.  Each day they wake up, catch two fish, eat them, and go back to bed.  It’s subsistence living at the most basic level.  There are no savings – no stored or saved wealth.  If someone gets sick and can’t fish, there’s no way to help them.  No one has any extra.

Now imagine two of these people dream up a boat and a net.  They spend six days catching one fish per day, slowly starving, but they make the boat and net.  On the 7th day, they go out into the ocean and catch 20 fish in the net – it worked!!!!

At this point, the island can go one of two ways.  First, since two people now produce what previously took ten, resources are freed up to do other things.  Farming corn, picking coconuts, cleaning fish, cooking, repairing the boat and net, the possibilities are endless.  The island ends up with more (and better!) food, new technologies, higher standards of living, more assets, more wealth, and they can now afford to take care of their sick and vulnerable!

Or…the eight people who don’t have a boat and net could become envious.  Two now produce ten fish per day, while everyone else can only produce two.   Income inequality now exists:  it’s no longer 1:1, it’s 5:1.  So, they devise a plan to tax 80% of the income of the boaters (16 fish) and redistribute two fish to each of the other inhabitants.

If the second plan is adopted, no one is better off.  Each inhabitant still only has two fish.  Moreover, the entrepreneurs have no incentive to fix their boat and net.  The island will eventually revert to subsistence.

This is the problem with taxation for redistribution: it robs the economy of the benefits of new technology.  Certainly, some of our brothers and sisters need help, sometimes permanently; sometimes temporarily.  However, taxation for redistribution doesn’t make the economy stronger; redistribution hurts growth.

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6 Comments on Income Inequality, Taxation, and Redistribution

  1. Taking this analogy to its most logical conclusion; The remaining eight are not only envious but punitive, the 2 boat builders are obviously evil because, since everyone knows there are only so many fish in the sea, the extra fish that they caught robbed the other 8 of fish they would have caught the old fashioned way. So not only are the 2 boat builders taxed but they are shunned. And if perchance the two decided to be charitable and give some fish away if the recipient was a Christian, then the lone LGBTQ person is now being harmed and deserving of the extra fish that the Christian would have got.

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  2. Our Constitution really had things worked out. But, people being the busybodies that they are, just couldn’t leave well enough alone.
    Enter AOC whose vast experience and great wisdom we have the chance to benefit by…if only we would listen and adopt the new green deal. NOT.
    Power corrupts and absolute power corrupts absolutely. Our founders were able to keep the genie in the bottle for awhile but as we all can see power really does corrupt, absolutely.

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  3. “None of it will matter in 12 years because of climate change the island will be under water!”

    Dammit. Back to eating fish everyday.

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  4. Speaking of chicken, I roasted one this afternoon. Damn it was good. “Organic free range” – means it ran around outside acting all happy, eating bugs and grain and socializing in the chicken’s pecking order universe (God approves). Lived a happy life (thanks to humans) and then ended up in my mouf. Is this a great country, or what? And don’t get me started on God and his fondness for eating and sex… 🙂

    I’m sorry, I’ve given up worrying about America’s corporate and political failings…

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