Economic inequality is one of the most prominently debated issues of the day, fueled partly due to the fact economic inequality has risen over the past few decades. This has caused some people to investigate the causes of the inequality and an overlapping set of people to demand government action to combat the inequality. Last week provided some new data on both the income being earned by households around the country and the economic inequality nationwide and in each state. That state-level view gives us some important insight into at least one policy that appears to be ineffective against inequality: the progressive income tax system. state.
The Census Bureau measures economic inequality by a Gini index on income. This index measures inequality on pre-tax income on a scale from 0 to 1. If everyone’s income was exactly the same, the Gini index would equal 0; if only one person had any income, the Gini index would equal 1. Each increase in the Gini index of 0.01 represents 1% of national income earned by higher-earning people compared to a perfectly even distribution of income. This measure is imperfect, ignoring taxes and wealth, but it is the best we have, particularly at the state level.
New data released last week from the Census Bureau’s American Community Survey reveal that only five states—California, Connecticut, Florida, Louisiana, and New York, plus the District of Columbia—have economic inequality that is greater than the national average. That suggests a very skewed distribution of state-level income inequality since one would expect half the states to have more inequality than average and half less. While the unbalanced and concentrated nature of inequality is worthy of discussion, for the moment let’s focus of an easy lesson to learn from this new report.