The Mismeasure of Inequality: Focus on Equal Opportunity, Not Outcomes
sigmundcarlandalfred.wordpress.com
In october 2011, the Congressional Budget Office published a report, “Trends in the Distribution of Household Income between 1979 and 2007,” showing that, during the period studied, aggregate income (as defined by thecbo) in the highest income quintiles grew more rapidly than income in the lower quintiles. This was particularly true for the top one percent of earners. This cbo study has been cited by the media and politicians as confirmation that income inequality has increased “substantially” during the period studied, and has been used to support President Obama’s claim that income inequality is a serious and growing problem in the United States that must be addressed by raising taxes on the highest income earners.
We will show that much of what has been reported about income inequality is misleading, factually incorrect, or of little or no consequence to our economic well-being. We will also show that middle-class incomes are not stagnating; in fact, middle-class incomes have risen significantly over the 29 years covered by the cbo study. Lastly, we will address assertions that the rich are not paying their “fair share” of taxes.
In our view, Americans should care about the well-being of the nation as a whole rather than whether some people earn more than others. To that end, the focus of public policy should not be on equality of income but on equality of economic opportunity. Policies designed to reduce income inequality inevitably involve redistribution of income through increases in transfer payments and marginal tax rates. But these policies discourage hiring and investment, which depresses economic growth and opportunity. In sharp contrast, policies designed to enhance equality of opportunity will increase economic well-being for all, most particularly those in lower income households.
INCOME INEQUALITY
Perhaps the most important question left out of almost every discussion about income inequality is, “Why should we care about it?”
Many of those who worry about high income inequality argue that it is an indicator of social injustice that must be remedied through redistribution of income (or wealth). Unfortunately, those who make this claim have not provided any generally accepted criteria for determining when an economic system is unjust. Nor have they provided a convincing argument that such injustice is widespread in the U.S. (In considering this issue, it is worth noting that Greece, Spain, and Italy all have substantially lower income inequality than the U.S. The same is true for Afghanistan, Pakistan, and Bangladesh.)