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2003-2004 Essay Contest Advanced Economics Second Place Essay

To Equate or Not to Equate: The Role of Government in Income Inequality

Elizabeth Fei
St. Paul Central High School
St. Paul, Minnesota

When one sees the term income inequality, immediately a negative meaning is drawn. (Hinderaker) However, income inequality isn't as bad as everyone believes. Income inequality is defined as an unequal distribution of the total income earned by a society among the different classes. For example the lowest one-fifth of the society would earn a lower percentage of the total wealth than the upper one-fifth of the society. But what should the government do about it? In my opinion, they should do nothing. A higher amount of income inequality does not necessarily indicate a higher poverty rate, and the problems that are claimed to be from income inequality actually stem from poverty. Additionally, attempts to equate the incomes of different classes would result in additional problems and an overall negative effect upon society. It is for these reasons that while the government should be involved in the elimination of poverty, it should not work against income inequality.

Contrary to popular belief, a more unequal distribution of income does not show that a certain section of society is any worse off in absolute terms. What people must remember is that it is a distribution of income, not an actual amount of income. In most cases the poorest section of society is seen earning a smaller percentage of the total income while the richest section society is seen earning a larger percentage of the total income. However, if all sections of society receive an additional amount of money proportional to their income, the lowest level of society is earning more money overall, even though the distribution of income has not changed. Likewise, if the lowest one-fifth of society earns additional money that is proportionately lower than the money received by other levels of society, the fact still remains that the section is still earning additional money. In this case, even though the income inequality has increased, the poorest level of society is not any worse off. They still have an increased amount of buying power within the market. (Arnold 660)

Income inequality should not be confused with poverty, nor assumed to be the cause of it. Poverty is defined in absolute terms by the government by the threshold of poverty. That is, below a certain specified amount of money a family is considered impoverished. In 2002, for a family of four, the threshold of poverty was $18,224 (Arnold 674). However consider the situation above. Suppose the bottom one-fifth of society increases its earnings so that it earns enough to not be considered impoverished. However, if the rest of society also earns more money, income inequality still exists. This is why income inequality can increase while poverty decreases. Income inequality is simply a result of the different incomes of different levels of society; it does not cause the negative effects that people claim. Things such as increased crime, decreased health quality and minimal education are all results of poverty, not income inequality.

If it is these negative effects that people worry about, then they should argue for increased governmental involvement in the issue of poverty. Perhaps an additional program to educate underprivileged families or increased governmental finding to primary education or polices that address the health of the lowest class would help "internalize" these problems experienced by society. If such programs were implemented it would dissolve these negative effects.

Others claim that income inequality has another negative effect. They claim that the gap in income causes a rift in society among the classes. (Hinderaker) They claim that the gap leads more people to see highest income levels as more unattainable. Although this may be true, without a differentiation in income among classes, the lower classes have nothing to attain to. This income gap gives the lower level of society a goal to achieve. Because they have seen what is possible to achieve, they have more of an incentive to work toward getting it.

For these reasons the government shouldn't do anything to equate income inequality. The problems associated with creating absolute income equality are greater than those that currently exist. In a society where absolute income equality exists, everyone, regardless of who they are or how productive they are, would receive the same amount of income. Assuming people are motivated primarily by income and not an internal drive to just "work," in this type of society, there would be no incentive or motivation to work by anyone. The lower, presumably less productive, sections would society would be less inclined to work because they know that they are just going to receive the same amount as everyone else. The upper, presumably more productive, sections of society would also work less because they know that the money that they earned will go to someone else. They would be less likely to work overtime or with increased effort because anything they earn above their allotted amount would just go to someone else. These are just some negative scenarios that could arise in the instillation of absolute income equality.

If it is the question of motivation that people worry about, perhaps it would be advantageous to society to instigate an education program aimed at drawing more lower-income levels into the workforce and at enlightening these classes as to their role in the context of the larger economy and society. Perhaps if these people know what they are working for, they would be more motivated, even if the income gap begins to increase. This increased education could also be used to give these classes a more equal opportunity to achieve what they see the higher-income levels achieving.

The current amount of government involvement in income inequality seems like the appropriate amount. Through the use of transfer payments such as medical assistance, subsidized housing, Social Security and welfare benefits, the lower level is brought upward in income, in an attempt to lessen the gap. These payments also give the lower level something to live off; without decreasing their desire to work. The gap is also somewhat lessened through the use of progressive taxes. The upper level income earners are affected more by this, which brings the gap between the upper and lower levels closer together. This allows the upper class to maintain their status and lifestyle without gaining all the wealth in a society or becoming too greedy.

In our current society, the governmental involvement in income inequality is sufficient Any more attempts to bridge the gaps in income would result in negative effects that would outweigh any positive gains from decreasing the income inequality. Although some problems currently exist because of low income, these are because of poverty, not because of income inequality. Instead of concentrating on bridging the gap between incomes, the government should concentrate on improving the lives of the impoverished, thereby solving the problems that stem from it.

Works Cited

Arnold, Roger A. "The Distribution of Income and Poverty." Economics. pp. 657-679.

Hinderaker, John H. and Scott W. Johnson. "The Truth About Income Inequality." December 1995.