Income Inequality And Policy

We find income inequality a completely silly issue to be concerned about.   Economic growth, poverty rates, various measures of unemployment and employment and several others are interesting because if we find policies to ameliorate these problems then we can help people.  With income inequality there are three problems: First, changing income inequality won’t necessarily help anyone.  Second, we don’t have a goal.  What is the perfect Gini coefficient?  Third, we don’t know how to change income inequality.

We found evidence on the third issue recently.  A MWG double hat tip to Simon Constable and Instapundit.  They led us to Ugo Traiano’s [his first name drives spell-check crazy] working paper on the impact of taxes on income inequality.  Ugo is at the University of Michigan.  It is only a working paper which means that it hasn’t been fully peer reviewed.  Almost all working papers have some peer review and this one, like most, thanks a few folks so it is mildly reliable.  We are not suggesting that the paper is definitive.  Rather, we are suggesting if you really want to change income inequality you need a bucket-load of evidence to convince folks that some set of policies will lead to an outcome.

Ugo finds that increasing tax revenues leads to more income inequality.  He finds that the results are robust to measures of income inequality and econometrics.  Notice that Ugo did not use increasing tax rates but increasing tax revenues so it leaves some opportunity to argue that increased tax rates might have the opposite effect on income inequality.  After all, at some point, increasing tax rates leads to less tax revenue.

We don’t find income inequality an interesting statistic.  We don’t think that government policy should be looking to change it.  If you do then you need to have evidence that your policies will lead to the outcome and what the outcome is.  In addition we would like to know the impact of said policies on serious measures like economic growth.

If you support lower tax rates and not raising the minimum wage to reduce income inequality then we are all with you.  But it has nothing to do with income inequality.


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