Government-driven inequality?

The ever-interesting ApeMan writes:

If you grant that overregulation, excessive lawsuits, and complex tax codes all present problems that increase the demand for high I.Q people, then the price for the labor of high I.Q actors should rise until demand and supply stabilize.  Therefore, it follows that if you grant that regulations, the rate of lawsuits, and the complexity of the tax codes are not optimal, then you must admit that the pay rate for high I.Q people is not optimal either.

A good point, but I am not convinced that a highly regulated society boosts income inequality.  On the flip side, the regulators themselves earn government salaries, and that favors greater equality.  Either they are the dregs pulled up a bit, or some otherwise high-salaried lawyers move to the greater security of the public sector.

How about inefficient regulation itself? 

Lots of smart people earn a mint finding creative ways around complexities in the tax code and in regulations.  But I still believe that those complexities tax smart people more than they benefit them.  The smart lawyer is paid so much only because some other smart guy wants to walk through that loophole and is otherwise suffering under the regulatory lash.

Imagine that a regulation chokes off an entrepreneurial opportunity worth $100 million.  Without regulation, one entrepreneur would have earned that much.  With regulation, a bunch of smart lawyers rake off, say, $20 million of the total but that is still a more equal distribution than the former scenario (which is not to say it is better).  An alternative scenario is that such large gains are usually spread across many shareholders, and lawyers walk in as the big winners, thereby boosting inequality, but I do not think that is the primary case.

Furthermore inequality tends to rise with wealth (imagine the Gini coefficient for Bel-Air), so inefficiencies which destroy wealth tend to lower inequality, albeit not for the better.

The Mexico or Indonesia scenario is different.  Government creates some monopolies and a small number of people get very rich from them.  That is unlike the case where smart lawyers get smart people through hurdles. 

The bottom line: To the extent income inequality is higher, I don’t view government as a fundamental cause, at least not in the United States.