You are here

Taxes, Welfare, and Economic Inequality

At a time when comprehensive tax reform is dominating news headlines, concerns about income inequality and the distributional effects of future tax changes are again being debated.  

Is income inequality a problem, and, if so, is it getting worse? In a recent video for Learn Liberty, Prof. Michael Munger (above) talks with interviewer Dave Rubin about the difference between material equality and status in income and consumption, coming to the conclusion that “there’s never been a time of greater equality.”

Questions about which economic policies the government should adopt today are often colored not just by what people think about current levels of income and measures of prosperity, but by comparisons to previous eras. And one of the most potent narratives about prosperity and equality in the U.S. is that the 1950s where a time when the nation had a more egalitarian—and therefore superior—distribution of wealth. In our second video, Prof. Brian Domitrovic of Sam Houston State University takes on what he calls “the myth of equality in the 1950s.”

Understanding the difference between absolute poverty and comparative inequality, and the attendant implications for policymaking, is at the center of two studies written by my CEI colleagues Iain Murray and Ryan Young last year. The first, People Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions, emphasizes that “the mathematical ratio between a society’s highest and lowest income and wealth strata is less important than the actual living standard for people living at the economic bottom.”

The twin study, The Rising Tide: Answering the Right Questions in the Inequality Debate, applies that insight to a number different current anti-poverty policies, highlighting their deficiencies and proposing alternatives and improvements. Iain and Ryan suggest that removing barriers to entrepreneurship, keeping energy affordable, fighting inflation with sound currency, and improving government transparency could provide many economic benefits that have so far eluded traditional programs for helping low income people.