Income Inequality, Taxes, and Incentives

In yesterday's New York Times, Ian Ayres and Aaron Edlin make a provocative proposal for taxing not the wealthy per se but inequality.  They rightly point out, as does Robert Frank in his new book The Darwin Economy, that extreme inequality produces all sorts of negative consequences for society (from felt deprivation to health, education, and democracy).  Inequality in the U.S. is quickly approaching developing country levels (we have long been the outlier among OECD countries), and Ayres and Edlin argue that the current trajectory could lead to serious social disruption.  They note that average income of the richest 1% is currently about 36 times median household income.  They propose an inequality tax tied not to absolute income but to the ration of a household's income to median income, effectively capping total income at the current position of 36 times median household income.  Just as we have a minimum wage, they propose a maximum wage.

The idea of relating income to national medians is intriguing and suggests other possibilities as well.  Perhaps we could use it to incentivize (to use the language of executive compensation) our elected officials by having congressional pay linked to median incomes (at 1:1 or 1:2).