Does pre-tax inequality matter? I ask because of a dispute between Aditya and Tim. Aditya says that inequality is back at 1920s levels - which is true if we consider the share of the richest 1% - to which Tim replies that the relevant metric is inequality after taxes and welfare benefits:
What we really want to do is measure the distribution after we’ve changed it. For only after we’ve checked how much we have changed it can we decide whether we want to change it some more.
However, I suspect that pre-redistribution inequality does matter.
For one thing, market rewards are linked to the esteem in which we hold ourselves and others; there's a reason why wages are called "earnings." The rich get respect from others and a sense of self-worth and arrogance, whilst those reliant upon "hand-outs" feel despised; this is why the unemployed are so unhappy, even controlling for (pdf) their low incomes. I would have expected a senior fellow of the Adam Smith Institute such as Tim to know this, as this is what the great man wrote:
This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition...[is] the great and most universal cause of the corruption of our moral sentiments...
We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent. (Theory of Moral Sentiments I.III.28)
Mere monetary redistribution doesn't solve this problem. Indeed, it might even exacerbate it, by making the rich feel that they are being deprived of their entitlements in order to support "scroungers". In this sense, inequality can lead to distrust, as Eric Uslaner has written (doc):
When some people have far more than others, neither those at the top nor those at the bottom are likely to consider the other as part of their “moral community.” They do not perceive a shared fate with others in society. Hence, they are less likely to trust people who may be different from themselves.
This matters, because trust is a significant influence upon economic growth.
Worse still, the high opinion the rich have of themselves tends to be shared by politicians. One of the more unpleasant aspects of New Labour was its deference towards bosses which led Gordon Brown to commission endless policy reviews from them, and in the US there's a revolving door between Washington and Wall Street. In this sense, pre-tax inequality of incomes generates an anti-democratic inequality of influence and political power.
But there's another reason why tax and benefits aren't sufficient to reduce inequality. A tax and benefit system does not distinguish between the sources of incomes. An income that is derived from rent-seeking, exploitation or cronyism is taxed as much as one obtained through talent and effort. James Crosby and J.K. Rowling are taxed similarly. But there's surely a difference between them.
Now, you might read all of this as a criticism of Tim. But that's not my main point. My point instead is addressed to the soft-brained left; higher taxes and more generous welfare benefits are nothing like sufficient to tackle inequality.