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Much political discussion today is driven by the perception that income inequality in the United States is greater than other countries and that this disparity is increasing.

For most Americans, this is a poignant argument because, since its founding, the belief that “all men are created equal” has been a profound underpinning of our value system. Proposals for a universal basic income, federal job guarantees and single-payer healthcare are prevalent and will continue to grow. They are the natural extension of a movement to narrow the gap among Americans’ income.

But before such policies gain traction, it is important to understand what the actual data on income in America look like. The data used to suggest growing income inequality in the U.S. comes from the Current Population Survey (CPS) for the U.S. Census Bureau. The CPS includes income from salary and wages, pensions, veteran’s benefits, government educational assistance, dividends, interest, rents and realities, social security and 17 other sources.

However, a recent study by John Early, a former assistant commissioner of the Bureau of Labor Statistics, points out that the CPS does not include benefits such as Medicaid, CHIP, the monetary value of SNAP or food stamps, free or subsidized rent payments, heating subsidies and other free or reduced-fee social services. When these transfer payments are counted in U.S. income, inequality is diminished considerably.

America’s progressive income tax, which taxes people with larger incomes at a higher rate than low income residents, removes further income inequality. And our income tax system also helps support poorer families through the Earned Income Tax Credit that gives tax credits to low and moderate-income earners. When these adjustments are considered, income inequality in the United States is lower than in many Western democracies. And the growth in income inequality here has been slower than it has been in other developed countries. Today only about 2 percent of the U.S. population lives in poverty. This is well below the 11 to 15 percent that has been reported by those who advocate further redistribution programs.

Despite these facts, the potential for gross income inequality should continue to be taken seriously because excessive differences among a population’s income can lead to major problems. One need only look at developing countries in Africa and Latin America and more developed ones such as Russia to see that the impact of very unequal income on the well-being of citizens is corrosive. In countries such as ours where per capita income is more equally distributed, citizens are incentivized to purchases goods and services produced by that country. This in turn allows businesses to grow and creates jobs. It also means that many have the resources to attend college and/or use their imagination and know-how to create and grow new business. These businesses employ more people thereby creating economic growth and increasing the wealth and well-being of increasingly larger portions of the population.

Over exuberant policies enacted to reduce perceived income inequality can have negative effects. They can often result in unintended consequences, forcing firms to reconsider hiring additional workers and causing them to locate new offices and plants in countries where such policies do not exist. Eventually these policies will lead to slacking in economic growth and even greater income inequality.

It is currently popular to point to the unequal distribution of income in the country as a rationale for the introduction of new policies and programs that strive to “even out” the country’s wealth. Some of these policies, in moderation, may be worthwhile, but taken in excess can spell economic disaster. What is important is to first have accurate measures of income distribution rather than relying on contrived figures that do not include many existing incomes leveling policies. Poor data may cause us to address problems that don’t exist or at best are overstated.

Misericordia
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Michael MacDowell

Guest Columnist

Michael A. MacDowell is the Managing Director of the Calvin K. Kazanjian Economics Foundation and President Emeritus of Misericordia University.