Thursday, March 22, 2012

The Relationship Between Income Inequality and Political Inequality In The UK and US

Growing income inequality appears to be an Anglo-American disease. This article raises questions about the policies of conservative government in the UK and the US. It argues that conservative policies in the UK and the US reflect the relationship between income inequality and political inequality. Growing wealth increases the purchasing power of the wealthy. They are able to purchase the support of government to increase their ability to extract rents from their economic activities. The proposed changes to the national healthcare services and the Ryan proposal for privatizing Medicare in the US are two examples. The conservative government in the UK has also proposed lowering the top marginal tax rate. That is exactly what was done in the US by both Reagan and Bush. They both claimed that lowering the top tax rates would accelerate economic growth. There is no evidence to support this theory, which some call "voodoo economics. In one of my recent posts, I reported studies that disprove the theory. The data also show that lowering the top tax rate in the US led to rising pre-tax inequality.

The bottom line is that rising income inequality in the US and the UK are due to a variety of factors, including globalization, but that government policies, promoted by the wealthy elite, have contributed to rising income inequality. It may not be a coincidence that Wall Street and The City Of London are both dominant sectors of the US and UK economies. Growth in income inequality is correlated with the rising share of economic output contributed by the financial services sector in both economies.

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