As noted in Chapter 14 of Exchange & Production: Competition, Coordination, & Co
ID: 1173395 • Letter: A
Question
As noted in Chapter 14 of Exchange & Production: Competition, Coordination, & Control, 3rd Edition, Armen Alchian & William R. Allen, distribution of income among various population groups followed roughly the same patterns in the USA, Sweden, and the former Soviet Union, despite the very different forms of economic organization in each of those countries. Social Justice Warriors today claim that if we had a planned economy in which government directed the direction of resources and confiscated money from wealthy people via high taxes, and then re-distributed those monies, that income inequality would be eliminated. Yet, that clearly was not the case in high-tax Sweden and the communist USSR. (In the USSR, the high-income groups tended to be those with membership in the Communist Party, about six percent of the population. Party membership was not easily obtained back then.) Economically speaking, why would this situation be the case, despite what modern academics, politicians, journalists, and activists are saying today? Please be specific in your answer.
Explanation / Answer
In order to reduce the income inequality, Progressive Income tax system has been the most effective way. Here the income tax is being charged based on the income and goes higher as the income rises. It is not charged uniformly to all. Thus the income inequality is somehow reduced.
In high-tax Sweden the tax collected from high income earners is not distributed uniformly to all and thus the inequality is still persisting. On the other hand, in communist USSR,the high income groups tended to be those with membership in the communist party and thus got a coverage and protection from being charged with heavy income tax. Thus the income earners are surviving well being associated with strong political party.
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