Why Inequality Matters

The Financial Times published the results of a study by the Deputy Director of the Research Department at the IMF which explains why income inequality matters.  While most people would like to see a more fair distribution of income, policy makers are wary of using the tax system to redistribute income.  Opponents of income redistribution believe that it distorts the incentive system and that it reduces economic growth.  The data in this cross sectional study of countries with different levels of equality and income redistribution did not find evidence to support that belief.  It found that growth is faster in more equal societies even with highly redistributive tax policies.  Moreover, it found that modestly redistributive tax policies have two important benefits.  They lead to a more equal distribution of post-tax income, which in turn, leads to a higher and more durable growth rate.  The redistributed tax revenues help to improve the infrastructure and human resources that are supportive of economic growth.