Rising Income Inequality: An Excuse for Bigger Government: Part I

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Concerns for the low-income portion of America is not unjustified – but rather it would be callous to pretend that everyone in America is well-off and is “dealt a fair hand.” However, the cause of fighting rising income inequality leads to an increased desire and need for more government intervention resulting in erosion of freedoms (McCloskey). Misinformed Americans thinking that income inequality can be solved by government is a larger problem than it seems at first glance. “Free people are not equal, and equal people are not free” (Reed).

According to a 2014 poll by Pew Research Center, 78% of people in the US saw the income gap in our country as a big problem (Weldon). Wherever the opinion of income inequality being a major problem came from cannot be narrowed down easily. Where the problem really lies is how the public can be so misinformed as to believe in a false opinion – really just propaganda. 57% of people in the US think that the distribution of wealth is unfair, according to a 2011 Gallup poll, and a CBS news poll found that 69% think that the income gap is increasing (Weldon). A majority of people who are misinformed about such an important issue as equality is not to be taken lightly at all.

Though even capitalists such as famous economist Ludwig von Mises admit that income inequality is an effect of capitalism, he makes the great point that inequality is everywhere in a free market and is the price to pay for such immense overall wealth that makes even the poorest in a capitalist society richer than the poorest in a statist society. Overall, free-market capitalism is a blessing, as the American people can see if they just look around their home at the goods that would not have been possible without innovation and free trade. A free market enables people to quench the desire to make something of themselves using their unique abilities. This has made possible the wealthy society that we know today as the United States of America, the land of opportunity where people are unequal, but have equal opportunity (Boudreaux).

Contrary to popular belief, income inequality is only increasing if you look at before-tax income, which is how highly-esteemed economist Thomas Piketty showed that income inequality is increasing. Measuring before-tax income and using that data to prove that there is a rising income gap doesn’t make sense because people do not consume their tax deductions. Their real income is after taxes and so if you’re going to study income inequality you have to use realistic data – and the fact is that “if one looks at after-tax income, the increase in income inequality over time is greatly reduced. If one goes further and factors in the government’s attempts to redistribute income, income inequality is not increasing in the U.S. at all” (Dorfman).

According to Mark J. Perry, a scholar at the American Enterprise Institute and a professor of Economics and Finance at the University of Michigan’s Flint campus, “After adjusting for both government transfers and federal taxes paid, the average household in the top quintile received less than 8 times more after-tax income ($188,200) than the average household in the bottom 20% ($24,100)” (“Adjusting for transfers and taxes”). When accounting for federal taxes and government transfer payments, income inequality almost halfway disappears (“Adjusting for transfers and taxes”).

Also, by using a single price index for cost of living, income inequality is exaggerated. Between 1994 and 2005, prices of low-end products that low-income households consume were falling. “This implies that non-durable inflation for the 10th percentile of the income distribution has only been 4.3 percent between 1994 and 2005 (0.4 percent per annum), while the non-durable inflation for the 90th percentile has been 11.9 percent (1.0 percent annually), and 13.4 percent (1.2 percent annually) for the richest 5 percent of households in the sample” (“Rising Income Inequality"). According to Perry, this adjusted cost of living index says that real incomes are gradually rising, instead of the income gap between the rich and the poor becoming larger (“Rising Income Inequality").

A method of measuring inequality, the Gini coefficient (ranges from 0% complete equality-100% complete inequality), also proves that income inequality is not rising. Throughout the 1960s-1980s, the Gini coefficient was rising, but leveled out starting in the mid-1990s through 2010, the most recent Gini coefficient data; again, clear-cut evidence that we should not be worried about the income gap rising (“The ‘Imaginary Hobgoblin’ of Income Inequality”).

Another flaw that rising income inequality data is founded upon is that increased capital is a cause of the increasing gap. According to classical philosopher Aristotle and modern-day French economist Piketty, capitals gains that usually exceed the economy’s growth will cause the share of returns in national income to increase because the wealthy people who have the capital will continue reinvesting in interest income, therefore causing rich people to have a larger share of overall national income. However, if capital gains are an unfair advantage to the wealthy as assumed by the above way of thinking, then other assumptions may also be made, such as “the rich always reinvest their returns”, “only rich people have capital”, “there is no such thing as human capital”, “most rich people inherit their wealth”, “the rich never lose money – no creative destruction”, and that “people care most about income inequality and don’t care about the working class”. Those assumptions about the rich don’t make economic sense, or common sense, for that matter (McCloskey 12-13).

A nation having a large amount of capital is not a problem, anyway. Capital is key to innovation, and innovation in a free-market economy means an overall better standard of living for us all, because not just the rich use capital. For example, small business owners in the middle class must have capital to begin their business. They must always have some capital to remain successful as well. Bad investments are also made, signaled by the “invisible hand” of market forces of supply and demand to weed out what is not profitable or necessary. Yes, most people who have capital are rich, however, but the fact that they are “rich” is beside the point because most rich people in a capitalist society accumulate their wealth not by cronyism but by their own work, which is beneficial to others in society (Borders).




Borders, Max. "#1 -- Income Inequality Arises From Market Forces and Requires Government Intervention." The Freeman 15 April 2014: 1. Web. 1 April 2015.
Boudreaux, Donald. "Equality and Capitalism." The Freeman 1 September 2002: 1. Web. 1 April 2015.
Dorfman, Jeffrey. "Dispelling Myths About Income Inequality." Forbes 8 May 2014: 1. Web. 1 April 2015.
McCloskey, Deirdre Nansen. "Measured, Unmeasured, Mismeasured, and Unjustified Pessimism: A Review Essay of Thomas Piketty's 'Capital in the Twenty-First Century'." Erasmus Journal for Philosophy and Economics 2014, Autumn ed.: 56. Document. 1 April 2015.
Perry, Mark J. "Adjusting for transfers and taxes reduces income inequality between highest and lowest quintiles by 50%." American Enterprise Institute 17 November 2014: 1. Web. 5 April 2015.
—. "Rising Income Inequality Has Been Exaggerated: 2X." Carpe Diem 20 September 2010: 1. Web. 1 April 2015.
—. "The 'Imaginary Hobgoblin' of Income Inequality." Carpe Diem 31 October 2011: 1. Web. 1 April 2015.
Reed, Lawrence W. "The Quackery of Equality." The Freeman 30 May 2012: 1. Web. 1 April 2015.
Weldon, Kathleen. "If I Were a Rich Man: Public Attitudes About Wealth and Taxes." Huffington Post 4 February 2015: 1. web. 7 February 2015.