Gini Coefficient in a Bottle: The Inequality Myth

The most commonly used marker for income inequality is called the Gini coefficient. Most leftists regularly refer to it when they make claims like “inequality is rising every year” or “the income gap is now worse than ever and getting even worse.” But what is the Gini coefficient, and why is it misleading?

The Gini coefficient is a ratio of income distribution developed by an Italian statistician named Corrado Gini. A coefficient of zero means everyone has exactly the same income. A coefficient of one means that only one person has all the income. National coefficients are almost always between zero and one. Our Gini coefficient has been dropping steadily over the years, but that doesn’t mean that rich people are necessarily getting richer and poor people are necessarily getting poorer.

Because there’s one element of the posted Gini coefficients that has been left out of the discussion: Gini coefficients are calculated on gross income—which means they don’t take into account taxes and transfers. An opinion piece in The Wall Street Journal gives the details:

Virtually all of the data cited by the left to decry the supposed explosion of income inequality, as Lee Ohanian and Kip Hagopian point out in their seminal paper, “The Mismeasure of Inequality” (Policy Review, 2011), use a Census Bureau definition of “money income” that excludes taxes, transfer payments like Medicaid, Medicare, nutrition assistance, the Earned Income Tax Credit, and even costly employee benefits such as health insurance.

 

Thus the data that is conventionally used to calculate the so-called Gini coefficient—the most commonly used measure of income inequality—ignore America’s highly progressive income tax system and the panoply of benefits and transfer payments. According to Messrs. Ohanian and Hagopian, once the effect of taxes and transfer payments is taken into account, “inequality actually declined 1.8% during the 16-year period between 1993 and 2009, when the Gini coefficient dropped from .395 to .388.”

 

In his speech, Mr. Obama cited a recent study from economists at Columbia University that found that already enacted benefits and tax programs have reduced America’s effective poverty rate by 40% since 1967—to 16% from 26%. But he ignores all this when he claims that inequality is increasing.

Obama can’t have it both ways. He wants more government programs, and he claims the ones we have are working. But how can they be working if income inequality has only gotten worse? And what does it mean if they are working? Think about it. If the Gini coefficient is only getting lower, but the income gap is shrinking, then that means one thing: the government redistribution of wealth is discouraging poor people from making more money (thus lowering their income) while forcing rich people to pay for an increasingly growing population of unproductive poor people.

The median income is actually going down. Gross (as opposed to net) income disparity should not be addressed by taking from the rich and giving to the poor. It should be addressed by encouraging the poor to increase their income. Welfare programs do not work to address this problem. They transfer money from the wealthy to the poor, but this very transfer exacerbates the problem. The hunger of the worker drives him on. Pay a worker not to work, and, guess what? He won’t work. And when he doesn’t work, his income decreases.

Even if government programs supplement this decreasing income, the poor person has not really been helped. He is just now all the more dependent on the so-called charity of the civil government, and ironically, the income of the rich. That means that, as long as the civil government is relying on the taxes of the rich, it should be encouraging the income gap. If rich people started making as little as poor people, how would welfare recipients (I’m including the civil government in that group) survive? According to the lowering Gini coefficient, there wouldn’t be money to give anyone if the rich didn’t make it.

Unless the civil government helps the poor to make money instead of merely helping them to have it, the Gini coefficient will, and has to, get uglier. So a decreasing Gini coefficient shouldn’t inspire more government welfare, but less. If you want to close the income gap, encourage poor people to work. If you want more jobs, let job creators keep their money. When they re-invest it into their own businesses, poor people will benefit—with more and better jobs. And everyone will be better off.

18 responses

  1. The reason the gap is getting wider is that this notion of Government creating wealth at the top & it will “trickle down” has been a complete failure

    • It’s interesting that no actual income numbers are given. Instead terms like, “barely scraping by” are used. The false assumption is that the rich get richer by taking from the poor. This is incorrect. It also assumes that the economy is a zero sum game, i.e., that the pie is a fixed size. This is a common and absurdly false thing that liberals believe.

      The people who put this video together are very concerned about how much wealth rich people have, but they are not concerned with how much wealth poor people have. Free economies have greater wealth disparity than less free economies. But in free economies, poor people have ten times as much wealth as those in restricted economies.

      • I don’t believe that to be the case. We can all agree that (1) socialism doesn’t work (2) If 1% of the country owned 99% of the wealth it wouldn’t be good either & (3) A rising tide lifts all boats. The top 10 percent of earners took more than half of the country’s total income in 2012, the highest level recorded since the government began collecting the relevant data a century ago,The top 1 percent took more than one-fifth of the income earned by Americans, one of the highest levels on record since 1913, when the government instituted an income tax.
        the bigger the tax cuts given to the 1 percent the bigger the income inequality. This is consistent with other studies that have shown the tax code has a big effect on income distribution. That’s one way Washington has boosted inequality: By slashing taxes on the rich, for freedom and growth and trickling down on the poor. Unfortunately contrary to what you will hear from conservatives, lower tax rates on the wealthy offer no obvious benefits to growth, or to the poor.

        • So, socialism doesn’t work? But what you propose is socialism, or don’t you see that? When you apply Robin Hood mentality (taking from the rich and giving to the poor), that IS socialism at its core.

          Here’s a little history lesson: Almost inevitably, the rich die off and leave their wealth to their families. Eventually, some foolish member of that family squanders all the money and property away, and someone else gets rich.

          It’s called “the law of the jungle: Eat or get eaten.”

          • The “death tax” takes 55% of that earned family wealth, it does not belong to the people or the Government. Robin Hood was tax collector.

          • Precisely. Robin Hood was a NON-governmental tax collector, the same as any criminal. But, for some reason, socialists love his goals, and overlook his lack of moral code.

        • A question. In you numbers, one, did you count gross or net income, and two did you include in the ‘poor’ range, all the benefits they get from the ‘rich’ and ‘middle class’ taxpayers? Things like welfare payments, WIC, Section 8 housing, food stamps, free or reduced cost meals at schools, medicaid, trips to the ER that they can’t pay for, Public Defenders, Obama phones, even subsidies for Obamacare. These are just a few of the ‘bennies’ that your ‘poor’ folk get that I don’t.

          If you do enter in these numbers, does all this come out the same?

        • Taxes have not been slashed for the rich, individual rates are as high as Clinton’s now. Corporations have “loopholes” to get them to reinvest therefore, creating jobs. Governments taking of assets and distributing as they see fit, is vote buying pure and simple

    • The sad lonely little scumbag liberal homo TROLL,mrBlob. The only “GAP” he knows about is the distance from his mouth to his a$$.

      Went up to mrBob last night and said, “I’ve got something 7″ inches long, in my trousers that I’d love to shove in your throat.”

      He looked quite enthusiastic about it until I pulled out my hunting knife.

    • I favor our form of government. The tax code needs to be tweaked a bit because the notion “trickle down economics” has been debunked & now the U.S. Has The Worst Income Inequality In The Developed World

  2. This article has many faults, first it says nothing about shrinking wages because of a labor market flooded by foreign workers through both legal and illegal immigration. With such a high percent of new jobs being part time with no benefits, the latest BLS report showed the 1% had an increase of over 30% in income while the rest of us suffered a decline. The CBO report states that these sad numbers will increase with the passage of another amnesty and reform.
    Second like all of these articles when talking about taxes it only uses the income tax as the base for their argument. When looking at all taxes from corporate and business which are regressive sales taxes along with regular sales taxes, property taxes, fees and any other money collected by government is all regressive making the middle class the highest effective rated tax payer.

    • Oh, the poor baby welfare titty sucker. A few more tears of what you ain’t got . . . Now shut your pie hole and get a job!

      Howdy Doody Conservative, that picture paints TRUTH!

  3. How interesting. If taxes taken from the rich and transfer payments given to the poor are not included in the calculations, then even if the government adopted the most extreme socialist policies and confiscated 100% of everyone’s wealth and then divided it equally among the entire population, these statistics would still show wide income disparity. Any measure of the success of your policies that specifically excludes the effect of your policies from consideration is going to show the problem as still unsolved — unless someone other than you solves it, I suppose.

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