Americans have been hearing a lot from politicians about income inequality, but it’s important to separate popular beliefs from proven realities. Popular beliefs include the following: (1) Middle-class incomes ?and living standards have largely stagnated since the late 1970s. (2) Social mobility has declined, and rising inequality is partly responsible. (3) Inequality is much worse in the United States than in Western Europe, and raising the top U.S. income-tax rates would change that.
Each of these beliefs deserves closer scrutiny. While there is certainly evidence of long-term wage stagnation, especially among less-skilled workers, broader measures of middle-class incomes and living standards reveal significant gains. Inequality has increased, but an exhaustive 2014 study concluded that intergenerational income mobility has been “extremely stable” for decades. Other research has likewise failed to show a serious connection between inequality and mobility, perhaps because the recent growth of American inequality has been driven by the top 1 percent of earners. If we look at inequality among the bottom 99 percent of households, U.S. and Western European levels are in the same ballpark — and America already has a more progressive tax system than the major European welfare states.
Bottom line: Income inequality per se is neither “bad” nor “good.” Opportunity and mobility are far more important. The goal of U.S. policy should therefore be, not to soak the rich, but to promote the economic and cultural underpinnings of broad-based prosperity.