Income Inequality Received Disproportionate Discussion

By Greg Harvey, Treasurer
Published in The Voice on February 27, 2014

Of all the needless bickering in Washington, none is more pointless than that over income inequality. Unfortunately, it’s also one of the most popular: President Obama, along with many major politicians, has spent considerable time discussing his “solutions” for inequality. However, income inequality is not actually an issue for the American economy.

Politicians routinely point to the country’s inequality as proof of the American Dream being dead and say that only rich children can ever be rich. However, according to The Equality of Opportunity Project, people born into low-income families today have nearly the exact same chances of becoming high-earners as anyone born since 1971. The chances for “rags-to-riches” success stories are no less now then they’ve been. 

Furthermore, statistical tests performed by Harvard economist Raj Chetty found that, for an area, “the size of the middle class…or the gap between the richest and poorest” people in the community has no effect on its level of mobility. Instead, per capita income growth (or overall economic growth), the number of single mother households (more single mothers correlating with less upward mobility), and local government spending levels (likely on schools, though with a much weaker correlation) were the main factors affecting mobility.

So the idea that income inequality ruins the poor’s chances of advancing in life are merely political, not supported by economic data. And because the basic premise for the argument is wrong, most of the proposed “solutions” are troubled as well.

First, increasing the minimum wage historically does little to lessen the income gap. According to the CATO institute, the vast majority of studies on the topic have found that raising minimum wages reduces employment primarily in the unskilled sector. Likewise, because any increases in demand for goods are neutralized by the higher prices businesses are forced to charge, CATO found “that past minimum wage hikes had no effects on poverty levels.”

The other approach to bridging the gap is to tax the rich more and give the increased revenue to the poor. However, this poses a few problems. First, the rich are the job creators in America. Instead of making their money from hedge funds, inheritances, and beating up poor people, as their reputation says, the majority of the notorious top 1% of earners are actually executives in small to medium sized companies. As these sized companies collectively employ over half the workforce, taxing entrepreneurs has a good chance of hurting the overall economy.

Another problem with increasing the rich’s taxes is that of fairness: the rich already pay a disproportionate amount. According to IRS data, the top 1% alone contributes for over 36% of the income tax burden; the top 5% pays over 58%. You can see, then, why the notion of making the rich “pay their fair share” is absurd; they already pay much more than their “fair share.” For the record, the bottom 50% of earners pay only 2% of the total income tax. Thankfully, the government has rich people to tax.

Overall, our current inequality is not detrimental to the future of America. The poor have just as many opportunities for advancement than ever before, and it’s hard to argue that we haven’t gotten consistently richer over time. Today, according to the Heritage Foundation, most Americans below the poverty line have “a car, multiple color TV’s,” and “[t]he overwhelming majority of poor Americans are not undernourished.” When you consider the harsher lives of our grandparents, our relative fortune is clear. History has shown that attempts by a government to forcibly make people richer, or more equal, don’t work. Just look at the Soviet Union.