Last Updated on August 6, 2019, by eNotes Editorial. Word Count: 704
This encyclical contains a statement of the Roman Catholic Church's position on political economy. It presents the Church as a champion and defender of the working classes, which it claims are oppressed. It states that the Church rejects free-market capitalism, communism, and socialism, and it provides its own political and economic recommendations, which it states are intended to create a more equitable and just distribution of wealth. Presumably, this means redistribution of wealth, as wealth creation is decentralized, rather than handed out from a central distribution center, unless it is first taken by the state.
Unfortunately, I feel that readers are left in the dark for most of the document as to the Church's definitions of "justice" and "equity" in regard to the distribution of wealth. Toward the end of the document, we learn that justice and equity demand that the state intervene to "eliminate or reduce" differences in compensation between industries for the common good. How does that work in practice Just how the state should intervene to "reduce or eliminate" differential compensation is not stated. Here is an example of how this might work (or not work), in my opinion: If the Church wants unskilled laborers and brain surgeons to be compensated equally, it will eliminate any incentive for anyone to invest the considerable time and money it takes to become a brain surgeon, because they can make the same income working retail. Brain surgeons and aspiring brain surgeons will simply move to other countries that compensate them for their considerable investment in education and training, leaving the former country with a severe shortage of brain surgeons. The same scenario applies to all highly skilled jobs.
If the Church wants to reduce the compensation of wealth generators and redistribute the money to the oppressed working class, they must tax wealth generators in order to have something to re-distribute. Roughly 4,000 years of accumulated experience tells us this is not as straightforward as it sounds. Set the tax rate too high and, during a downturn, businesses will be forced to lay off workers or close, compounding the problem that taxation was meant to solve.
One solution that some have proposed is taxing the very rich with a top marginal tax rate of 70% for every dollar earned above $10,000,000 for the year. In my opinion, this solution is not feasible or fair, and it might lead to adverse consequences and a loss of wealth creators in the country. Take, for example, the founder of Facebook that moved to Singapore to avoid giving most of his new wealth away to the government. Whether or not we agree with that is beside the point. It does and will happen, placing an upper limit on the amount the state can actually tax wealth producers.
Additionally, the established rich are not going to just sit around and be taxed at 70% (while it is important to note that this tax rate would only apply to income earned over the $10 million benchmark). They hire the same accountants that designed the tax code to find loopholes to legally avoid those taxes, they situate the most productive parts of their businesses in low-tax countries and pay taxes there instead, or they move themselves and their businesses to low-tax countries.
This tells us there is an upper limit for taxes, beyond which higher tax rates will only reduce government revenue for re-distribution. In economics, this is known as the Laffer curve. Set the tax rate at 100% of income and you have eliminated the incentive to work completely and will collect very little, if any, taxes at all. As you lower the tax rate, you will collect more and more in taxes until the optimal tax rate is reached. Try to go any higher, and tax revenues will again decline. However, some people have questioned the validity of the Laffer curve and maintain that it is an oversimplification.
The Church does not seem to have taken its own advice regarding reducing differential compensation. The Pope is estimated to have an income of at least several million dollars a year, in addition to job perks like living in a vast fortified palace with priceless art collections. Compare that with, say, a parish priest with an income of $25,000.