A Theory of Income and Wealth Distribution

A Theory of Income and Wealth Distribution: Self-interest for Private and Common Good
by: Surendra K. Kaushik, Ph.D.
We were hopeful that 2011 would begin with an uplifting human spirit and the economy for a better condition for more people everywhere. The Great Recession of 2007-2009 has made it even more desired than before as more people have slipped from where they were prior to 2007. What can be done to improve things? One thing is obviously an increase in economic growth and GDP. Self-interest, identified by Adam Smith as the central motivating force in human endeavor, accounts for much of the economic and material progress made by humanity over the millennia.
But self-interest also causes very different success among individuals and countries based on the endowments of people, natural resources, knowledge and technology creation and their use in production of goods and services, culture, and governance systems, etc. across the world. Extreme concentration of income and wealth is common place albeit at different income and wealth levels. Example abound: 1 percent of Americans owning 24 percent of income; a billionaire in India being several times more ahead of the poorest in India compared with a billionaire in the US; eruptions in Tunisia and Egypt. Marxians always remind us of the cycles of inevitable revolutions, peaceful or violent-more often violent, that follow conditions of extreme poverty and richness.
We want to use the self and interest and the market mechanism to produce the most income and wealth but we don’t want extremes of wealth and poverty per se and also because societies become unsustainable under such conditions. What can governments; the business sector and wealthy families and individuals do to slowdown the slide and help fellow human beings everywhere?
One possible way to resolve the extreme distribution of income on the one hand and the budget deficit of the federal government on the other is to not tax the rich more (currently thought to be anyone above $250,000 of annual income) but to require the rich to give back. A rich family/person should keep a reasonable portion needed for himself/herself and his/her family and give the rest to the community by investment in education, health, nonprofit service organizations, entrepreneurship incubators, schools, colleges, and feeding and housing the poor and lower income in America and other worthy causes around the globe. In other words, rich people can invest in society and its future growth for common good by helping others, and giving them a chance for a better future. This is in addition to the good they do as investors in business and employers in pursuit of their own income and wealth maximization.
This follows the great examples of Andrew Carnegie, Warren Buffett, Bill and Melinda Gates, the Ford family, the Rockefeller family, etc. This way we keep the self-interest working in a positive way, like Warren Buffet continues to maximize income, learned from childhood to MBA at Columbia, but then donates it back to society and take the tax-deduction as well which avoids the necessity but possibly negative consequences of high tax rates on the successful and rich. Self-interest as the driving force in a market economy foresaw the need for good governance and morals of market participants otherwise they would tend to collude and monopolize in the analysis of Adam Smith (1776). If competition was not adequate the government had to see to it that self-interest did not turn into greed. Clearly the government failed in managing the societal pleasure-pain trade-off by allowing self-interest to become greed of the smartest and the most knowledgeable in finance, management, accounting and auditing, and in statistics and mathematics as applied to economic and financial models and forecasting. It would be far more desirable to keep the income and wealth maximization as a goal with incentives like lowest possible tax on all incomes, albeit at graduated rates, and then to give further incentive of tax-deductibility to donate an increasing percentage of taxable income. Donors will continue to give to the community cause of their choice within the federal tax system. Those who decide not to give would be taxed at the proposed rates so that the government can fund its services without adding to the fiscal deficit.
The main idea is to maximize production of income in society and then use it fairly through private, community, and government spending. This may solve the recurring problem of the super success of capitalists followed by an increasing unequal distribution of income and wealth which in turn is followed by revolutions, violent or peaceful, through history. The latest example is the financial crisis of 2007-2008. We do not what additional negative consequences it will bring. We do know that things don’t look good, there is a great deal of uncertainty and governments are worried about their budgets and markets are worried about governments and their fiscal health.
Warren Buffett and Bill Gates should not only round up the rich in the US, Europe, India, Jordan, Egypt,… to give but impress the public and the Congress in the US to create laws to institutionalize this new system of income and wealth distribution while preserving the unfettered pursuit of income, wealth and pleasure in a market system.

Surendra Kaushik is a professor of finance in the Lubin School of Business of Pace University in New York and founder of Mrs. Helena Kaushik Women’s College (www.helenakaushik.org) in his native village Malsisar, district Jhunjhunu, Rajasthan. He can be reached at skaushik@pace.edu.