A Deeper Look at Income Inequality

KEY=20 POINTS:

The question for policymakers is not how best to=20 redistribute a shrinking economic pie.  The focus = ought to be=20 on increasing living standards, expanding the pie of = economic=20 opportunity, and promoting upward mobility for=20 all.

Conventional wisdom on government=E2=80=99s role in = inequality often=20 has it backwards: tax reforms have resulted in a = more=20 progressive federal income tax; government transfer = payments have become less progressive (due in large = part to=20 growing entitlement payments to wealthier = seniors).

Rather than further divide Americans, there is = growing=20 bipartisan consensus to target corporate welfare, to = income-adjust=20 entitlement programs, and to reform the tax code by = removing=20 loopholes and lowering barriers to = growth.

The Congressional Budget Office (CBO) recently = released a=20 study on changes in the distribution of household income = in=20 America from 1979 to 2007. This study has added fuel to an=20 intensifying debate in Washington and across America over = income=20 inequality =E2=80=93 what causes it, how do government = policies affect it,=20 and what should policymakers do about it?

The primary means by which government policy directly = affects=20 income inequality is through the redistribution of wealth = via taxes=20 and transfer programs such as Social Security, Medicare, and = Medicaid. Therefore, it is not surprising that views on = inequality=20 have colored recent debates over debt and deficit reduction, = since=20 most deficit-reduction proposals involve changes to tax = rates and=20 transfer programs.

As policymakers evaluate competing approaches to deficit=20 reduction, it is important that the impact of past policy = changes=20 are properly understood. This is especially true if deficit=20 reduction efforts aim to maximize economic growth, = opportunity,=20 upward mobility, and prosperity for all = Americans =E2=80=93=20 rather than just to change the distribution of a shrinking = economic=20 pie.

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