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.
