Merit doesn't cause income...
so just compress income directly
In a podcast interview with the terrific Joseph Walker, geneticist Robert Plomin said something that stuck in my mind—"in a meritocracy there will still be large deviations of income due to genetic variation in abilities."
I also stumbled onto an economics blog about capital taxation that relied on the idea that high capital incomes come from previous savers who therefore deserve that higher income (I can't seem to find it again, but I'm sure you've heard the idea before). To bring Plomin's comment into the mix, we could say that if genetics determines time-preferences or risk-taking attitudes, then capital incomes are also be determined genetically. Taxing those capital incomes is therefore taxing the "merit" of saving.
Like much of the economic and political debate about poverty and inequality, these ideas rely on a flawed understanding of how income is distributed in human societies. That flaw is to pretend that there is something called "merit" or "value" (or "productivity" for that matter) that is independent of the ability to be rewarded via payments.
Think about it like this. We often look at the characteristics of people who earn more money—their education, their patience, their leadership skills, their attractiveness—and then label those attributes that correlate with incomes as "merit", or "value", or "productivity". This approach merely defines "merit" based on current income. If "merit" causes incomes, there must be a way to define and measure it independently before looking at any correlations.
Imagine LeBron James was born in 1784. His genetic gifts are identical—his athleticism, work ethic, and his overall intelligence on every dimension. His genetic "value" or "merit" assessed without reference to his income is identical to what it is now.
But society at that time would be structured in a way that his genetic gifts would make him a high-value slave. His personal reward would be the pleasure of working hard manual agricultural tasks for longer, and the slave owner would get the income for having the "merit", "value", and "skills" of cultivating high productivity slaves. (Do you see the parallel with capital owners generally? Their "skill" and "value" is choosing investments. In practice, that means choosing what tasks other people do when they work for their income.)
Here's another example. In-breeding of royal families historically led to genetic variation that made many of them useless in the productive activities of the day. Despite this, their incomes and power remained nearly identical to their genetically superior siblings. If our social structures mean that "merit" determines income, and "merit" is heavily genetically determined, this should not happen.
In fact, if you follow the logic that genetic variation causes merit variation, which causes income variation, then genetically diverse places should naturally have more inequality. That "homogenous Nordics" argument rears its head again. Compression of genetic variability or some other attribute we have labelled "merit", like education, can compress the income distribution.
But in reality, the Nordics compress their income distribution through welfare state policies. Their market income distribution is much the same as peer nations. They merely choose to create a social structure that keeps the income distribution more compressed regardless of any underlying variation in individual attributes, genetic or otherwise.
We also know that income and wealth inequality has grown tremendously in the past four decades. This has nothing to do with changing genetic variation. It has nothing to do with a changing distribution of an independently-assessable concept of "merit". School teachers make lower relative salaries today because we chose not to raise their salaries faster. Some countries didn't do this, and their school teachers make more money.
Some of you might be thinking that places with high-income school teachers have better teachers. But you are again failing at basic logic by reversing out "merit" from income.
We know that increasing incomes actually causes changes in personal attributes that are usually labelled as "merit" and assumed to be determined independently from income. Basic income experiments show that higher incomes cause people to become more confident, trusting, healthy, less depressed and more able to concentrate, for example.
It seems logical to me that if there is no such thing as an independent concept of "merit" or "value", then we should simply choose a more compressed income distribution in society rather than the unequal one we have chosen. That more compressed distribution will help avoid the pitfalls of high inequality by ensuring that regardless of variation in genetics or "merit", people can live comfortable lives and take opportunities that low incomes often prevent them from doing.
In practice, this comes about by setting an income range via the tax and transfer system. Very high marginal tax rates on high incomes, coupled with generous unconditional payments for low-income households, will compress incomes.
Perhaps the minimum income could be roughly $20,000 per person (with variation depending on household size and type), with a maximum of $2,000,000 per person. That leaves a 100x income range within which market-based incentives can operate. I see no reason why the range of variation should be any higher than that. Can individual merit, however defined, really explain a 1000x variation in income? Will some people not go to work because they earn $8,000 per day instead of $20,000 per day, even if there are no $20,000/day options because of the tax system? I doubt it. People won't even see a change in their rank within the distribution.
Income compression should be the focus of policies for dealing with poverty and inequality. Ideas that rely on "merit", "value", or "productivity" are going to be failures as they implicitly (or explicitly) define merit by income.