As we now know - post Lehmann - that markets are not efficient allocators of resources, perhaps it is time we also acknowledged that rewards are also not the result of a "fair" allocation of opportunities and labour. Yes, these things contribute. But so does luck to a huge extent.
Instead of merely accepting the allocations of wealth which fortune dictates, we might target the kind of wealth sharing we think is reasonable. Not a flat and simplistic equal wealth for everyone model. But also not a winner-takes-all gradient, in which a tiny minority ends up with all of the wealth.
One way to solve this is to target tax rates in different quintiles according to the public's sense of proportionate wealth. There's a clue about this in a recent Harvard-Duke study mentioned in this NYT article: http://www.nytimes.com/2011/11/20/opinion/sunday/kristof-occupy-the-agenda.html?_r=1
"A new study by Michael I. Norton of Harvard Business School and Dan Ariely of Duke University polled Americans about what wealth distribution would be optimal. People across the board thought that the richest 20 percent of Americans should control about one-third of the nation’s wealth, and the poorest 20 percent about one-tenth."
We might do the same in terms of tax. Make each quintile responsible for a certain portion of tax. Then have each quintile decide how it wishes to tax itself to deliver its portion of taxes. The proportions would be defined by what Americans in total thought each quintile should bear based on their notions of proportion and reasonableness.
There would need to be a transition period, during which the current income inequalities are ironed out. But once you have achieved a wealth incentives versus equality gradient with which the vast majority agree, then all power to the winners of the lottery of life.
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