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How Government, Not Capitalism, Is Causing Income Inequality

Arguments claiming that income inequality is the foundation of the Great Recession, and of today’s sluggish economic growth, are false because they neglect to include income mobility, economic growth, tax changes, and government programs that keep the poor, well, poor. These myths have led many to look down on the top 1% when we should instead be promoting more of them. Households in this group should not be made the villains of slow economic growth and record budget deficits, which stem primarily from excessive government spending. 

Although there are reasons to doubt some arguments made about income inequality, it is important to start with household income data. The Census Bureau reported that the top 5% of income earners have incomes above $180,000, and the top 1% includes not only millionaires but household incomes above $360,000. A 2011 report by the Tax Foundation noted in 2009 the top 5% had 32% of aggregate income; the top 1% paid 37% of taxes, the top 5% paid 60%, and the bottom 50% paid 2.3% of taxes; there were slightly fewer than 1.4 million households in the top 1% and this group paid the highest average tax rate of 24%. Additional evidence shows that the top 1% own around 40% of the nation's wealth, and 80% of the top 1% earned their income instead of the common misconception that it was inherited. 

With regard to budget deficits, raising taxes on the top 1%, or any other group, will not solve the problem. History shows that tax revenues as a percentage of GDP have averaged around 18%, regardless of whether tax rates are high or low. Although this may be true, the opportunity costs of higher taxes throughout the economy lead to other inefficiencies not accounted for by analyzing only tax revenues. The cures for deficits will come from economic growth and spending cuts by our bloated government. 

What is it about the top 1% or any upper income share that many believe is wrong? It is time for the government to provide an economic environment conducive for all income groups, including the top 1% and bottom 1%, by not picking winners and losers. The rhetoric about income inequality by President Barack Obama and members of Congress has been nothing more than class warfare, with real solutions.

If income inequality is even a concern in this country — and there are definitely bigger fish to fry — then the government is the biggest contributor. The protests by the Occupy Wall Street crowd seem founded on income inequality. It might be different if the top 1% protested the bottom 99% by laying-off workers and taking their investments out of stocks, houses, and government bonds. The problem with these OWS protests is that they should be protesting in D.C. and not on Wall Street.

Blaming capitalism for the ills of income inequality is also incorrect. In a capitalist system, markets provide information to allow prices and wages to send signals for an efficient allocation of scarce resources. With diversified levels of educational attainment, different years of training, and other factors, one's marginal product of labor may demand a much higher wage than someone else. It is probable that there would be high levels of income inequality in a capitalist system. Despite this, the vast differences in incomes between households would be based on market forces and not on mandates and distortions to incentives in the labor market put in place by the government. 

Government, then, is a virus that continues to plague the epidemic of income inequality. Unfortunately, there are those who believe government the cure. What types of government programs contribute to keeping the rich, rich and the poor, poor? Here are a few: Subsidies in general (i.e. large farm companies); tax breaks for renewable and nonrenewable energy production; welfare programs that reduce incentives for those in lower income groups to increase their productivity (despite this 60% of the bottom 20% still move up into higher income groups because of income mobility. Interestingly, 40% move down from the top 20%); a failing public school system; progressive tax system that affects workers' productivity; the minimum wage; safety nets and the list could go on. The effects of these policies tend either to be a wage floor for those incomes at the top or a wage ceiling for those with lower incomes. 

The recent op-ed article in the Wall Street Journal by Stephen Moore and Walter E. Williams correctly argues that deductions and loopholes should be taken away from those making over one million dollars. One could also argue that deductions and loopholes should be removed for all taxpayers and lower the marginal tax rates, with the goal of having a flat consumption tax or flat income tax. Removing subsidies and tax breaks to corporations and individuals would provide more efficient outcomes. This would not only benefit the economy as a whole, but individuals as well.

Socialism has punctured a wound in the side of America for far too long. Why not take a break from our socialist policies by both political parties and move toward capitalism?

Some may argue that a country with an economic system based on capitalism does not have a heart and many people will suffer because they cannot fend for themselves. This is an unfounded argument based on a perception that the government is the primary source of benefits for those who have needs and are unable or unwilling to provide for themselves.

Religious organizations, charities, family members, and NGOs could replace welfare programs. These types of resources would have to be accountable, transparent, and efficient or risk closing; they would also have to provide valuable services because they will be competing for donations. Competition does not exist or is driven out by government programs. This is probably the biggest problem with government programs: they have the power of the purse and remain in business even when they fail. 

The government is not the answer and creates more problems than it solves from the redistribution of income and waste. More choices given to individuals with their money and the spontaneous order of society will bring about the most efficient outcomes. Therefore, those in society may not be getting paid what they are "worth" because of government manipulation and lack of capitalism, where risk equals reward or failure. Voter ignorance creates an environment in politics that repeats the same mistakes (see Learn Liberty short video).

To reform our society in a way that benefits everyone, we must educate ourselves and expand our knowledge of our world. As noted by Socrates, "The unquestioned mind is not worth living." In today's divided political sphere, more constructive debates are needed more than ever. Let us keep up the fight for liberty, America!

Photo Credit: badlyricpolice 

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