Whatever happened to incentive?

Labor leader Bill Shorten’s freshly invigorated inequality narrative has sparked a debate focused on whether inequality is increasing. The answer is the claim of rising inequality lies somewhere between a distortion of the facts and a complete falsehood — but that will not be the end of the matter.

Putting the myth of ‘rising inequality’ up in lights serves as a tool to make inequality a political issue by hooking into a strand of contemporary public sentiment — just as the claim that Medicare would be privatised cleverly made the future of Medicare an issue.

The political strategy works because ‘rising inequality’ is a catch-all for assorted grievances about housing affordability, stagnant real wages, job insecurity, sky-rocketing energy costs … and so on.

The public is rightly concerned about such issues, and public policy needs to address each of them one by one to the extent it can without creating new economic costs. What Labor seems to be preparing the ground for is something entirely different — a new wave of redistributive tax policies to take more from the few and sprinkle it across the many, with an electorally serviceable claim to economic disadvantage.

Tax increases in general — and more steeply graduated income taxes in particular — have strong disincentive effects that seem to have been forgotten about in this debate. Most of our politicians stopped talking about incentive long ago and now can’t see past ‘fairness’ and inequality. Economic inequality is not intrinsically bad and equality does not equate to fairness. Policies need to give more attention to incentive.

Australia’s tax, social security and welfare systems are already highly redistributive towards a more equal income distribution and very effective in saving people from absolute poverty. The issue is not how to redesign the system to make it even more redistributive, but how to attenuate the disincentive effects of highly progressive income tax and means-tested social benefits.