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Fall of the Berlin Wall: The Problems of too Much Equality

November 7, 2014 in Economics

By Swaminathan S. Anklesaria Aiyar

Swaminathan S. Anklesaria Aiyar

Fears of ever-rising economic inequality have been stoked by the runaway success of Thomas Piketty’s book “Capitalism in the 21st Century.” Yet the 25th anniversary of the fall of the Berlin Wall should remind us that excessive equality can cause social strain and collapse more surely than excessive inequality.

Millions left East Germany because they found the system unfair: It produced equality by massively denying individual economic opportunities. So, they risked life and limb by fleeing to West Germany, which had more inequality but lots of opportunity.

Many refugees also sought more political freedom. But they were overwhelmingly educated, talented youngsters, for whom forced equality in East Germany amounted to a huge implicit tax. Seen in this light, they sought not just political liberty but freedom from exorbitant implicit taxation. This doesn’t mean that inequality is an unqualified virtue; it’s possible to have too much of it. Yet the Berlin Wall anniversary reminds us that the virtues of equality can be overstated.

Whatever the merits of equality, it must not be attempted through implicit or explicit taxation so severe that it drives away skill and capital.”

East Germany had equality, no unemployment, free education and health, and succor for the sick, handicapped and aged. It was an egalitarian welfare state with higher living standards than Germany had enjoyed before World War II. Yet, by 1961, an estimated 3.5 million people had fled from egalitarian East Germany to inegalitarian West Germany, inducing the erection of the Wall.

This story was repeated elsewhere. Communist North Korea is more egalitarian than South Korea, yet millions fled from it to the south.

Mao Zedong created an egalitarian China, in stark contrast with Hong Kong, which was among the most unequal places in the world. Yet thousands swam across shark infested waters from egalitarian China to inegalitarian Hong Kong. None swam in the opposite direction, not even Marxist professors.

Piketty says he belongs to the post-Berlin Wall era, and has no illusions about the forced equality attempted by communist states. He favors a high wealth tax to soak the undeserving rich. Since this would induce the highly taxed to flee, just as they fled from East Germany, he proposes a high global wealth tax to prevent migration.

But there is no reason for Singapore, Hong Kong or other low-tax countries to co-operate, since they are happy to attract the rich and talented, and don’t care …read more

Source: OP-EDS

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