What Caused Inequality to Grow?

This is Megan McArdle, writing in The Atlantic:

It is a commonplace that since the 1970s, inequality in America has been growing rapidly — far more rapidly than our peers abroad… But Scott Winship offers an intriguing alternative possibility — is our outsized growth rate an artifact of mid-eighties changes to our tax code?

What happened? 1986 to 1988 happened… a four percentage point increase in two years — three times the increase over the 16 years from 1970 to 1986, and bigger than the 12-year increase from 1988 to 2000.  Huh…

It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase)…

McArdle continues:

Winship shows that if he adjusts that anomalous 1986-88 growth rate to the level that prevailed in other countries, the trend in our inequality growth looks about the same.

Comments (8)

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  1. Devon Herrick says:

    Social Scientists who worry about inequity often forget that people who begin at the bottom of the income distribution often raise their standard of living over time. At the high end of the income distribution, those who earn far more than average often create jobs that would not exist absent their skills. To some degree the quest for equity is a fantasy because equity cannot exist without living standards falling for all workers.

  2. Tom H. says:

    Very interesting. Also, very plausible.

  3. Ken says:

    There is much too much ado about inequalty. I hate to even see it discussed at this blog. But if it has to be discussed, this is a good post.

  4. Erik says:

    Income inequity has to do with the hoarding of dollars by those with superiority complexes. Our economy only works when dollars are free flowing within our managed capitalistic economic system. Once those dollars are hoarded and not moving from hand-to-hand we get what we see today.

    Mega-Rich people stating that they and only they can create jobs with their vast wealth so we must do what they say. To me this is a form of mental disease, or fascism? As we all know, Mussolini made the trains arrive on time.

    I say tax them and let the dollars flow freely.

  5. Bruce says:

    Thank God Erik has only one vote.

  6. Larry C. says:

    Nifty argument. Neat graphic.

  7. Virginia says:

    Ah… what is a week without discussion of income inequality?

    It’s an interesting idea that tax code changes might create big changes in data. It’s a very plausible explanation of a one-time change in inequality. What about over the long run, though? Would people continue to report more income on their personal returns?

  8. Don Levit says:

    The point is that the top 10% of families control 85% of all financial,assets.
    If 70% of our GDP is determined by consumption, that level of disparity will affect the rich as well.
    Consumption used to be a disease.
    Maybe it still is – a mental one.
    Don Levit