Income Inequality is Not a Problem: The Free Market is Making All Americans Richer (Debate)


Editor's note: This article is part of a debate on income inequality with Michael De Los Santos. For his response, see here.

The grass is always greener on the other side. The so-called "99 percent" are green with envy for top earners, and they want the government to enact policies that close the income gap. In one of the latest books to come out on income inequality, Joseph Stiglitz says that the rich keep getting richer, and they are paying less in taxes. This is more of a populist talking point, less a depiction of reality — and it's a dangerous concept to drive public policy.

The U.S. tax code is remarkably progressive, meaning that the rich pay much more than the poor in taxes. In fact, the top 20 percent of households now pay 94 percent of federal income taxes. Meanwhile, over 41 percent of tax filers paid zero taxes last year. Overall, top earners face higher tax rates, contribute more tax revenue, and benefit less from transfer payments than low-income people. 

Focusing on income inequality distracts from the bigger picture: Poor people are enjoying richer lives, and it's thanks to free markets and voluntary exchange — not tax-and-spend government policies. Market economics has pulled hundreds of millions of people out of poverty in the world. In fact, the percentage of the world’s population living on a dollar a day has fallen by over 80 percent since 1970, according to the American Enterprise Institute. That's amazing.

Some people living in the United States are truly disadvantaged and vulnerable, and the government should provide a basic safety net for them to get them off their feet. Even Friedrich Hayek, the celebrated Austrian economist, said that the government should provide one. Nobel laureate economist Milton Friedman was particularly concerned about the welfare of the poor, and the policies he designed were successful in helping the poor pull themselves up out of poverty. 

The United States is well past this point, however; the American population is becoming increasingly dependent on government. Transfer payments (i.e., welfare and entitlements) comprise 62 percent of the federal budget. We spend over $75 billion in food stamps every year, and we keep extending the length of time that people can receive unemployment benefits. Plus, President Obama is attempting to waive work requirements for welfare recipients, which historically has been successful in helping poor people pull themselves out of poverty.

We're quickly becoming a nation of Julias!

If we focus on limiting income inequality, then we will miss out on gains in the market economy. Policymakers in the United States and abroad should enact policies that encourage market solutions, instead of redistributing wealth, in order to improve overall welfare.