Wealth and Poverty: What's the Government's Role?

What's the Government's Role?

The U.S. government is already working to address income inequality and poverty. Some people believe that the government should be doing more, some believe it should be doing less, and some feel that the current role is about right.

Here are some of the policies that the government has in place to address income inequality and assist poor households:

  • Progressive income tax: A progressive income tax taxes people with higher incomes at higher rates. In 2001, U.S. federal tax rates started at 15 percent and climbed to 39 percent, with three intermediate brackets. Except for transfer payments and public assistance programs, all U.S. citizens receive the same basic federal services in terms of defense, law enforcement, food and drug regulation, and so on. Yet wealthier citizens pay more for these services. This smacks of the Marxist principle, “from each according to his means,” yet most Americans (but not all) feel that progressive taxation is ultimately fair. So, while the wealthiest Americans have a larger share of the income pie, they also pay more in taxes.
  • Public assistance programs: Federal unemployment insurance, Medicare, and federal welfare programs, such as Food Stamps, all help poor and temporarily hard-pressed households make ends meet. While Social Security is not a welfare program (because workers pay a specific Social Security tax for these benefits), it does provide financial assistance to millions of retirees and people unable to work.
  • Economic development programs: Federal programs that help finance minority- and women-owned business, such as those of the Small Business Administration, help redress the imbalances created by job discrimination in the past, and so do efforts that encourage these businesses to apply for government contracts. Federal money also finds its way into state and municipal programs to train unskilled workers and encourage business formation, for instance in “enterprise zones” designed to foster redevelopment in the inner city.
  • Managing the economy: The federal government implements economic policies aimed at generating full employment as well as low inflation. While this benefits wealthy Americans as well as the less well off, the emphasis on controlling unemployment arguably helps wage earners more than it does “the moneyed class.”

A progressive income tax levies higher taxes on higher incomes. Typically, marginal income is taxed at marginally higher rates. For example, income up to $20,000 may be taxed at 15 percent, income between $20,000 and $35,000 at 20 percent, and so on. (If only the tax code were that simple.) In other words, the higher rate does not apply to all income, but rather to the marginal income.

All of that said, the United States generally provides its citizens with a lower level of government support for health and human services than most developed European nations. This is true for services that benefit the middle class as well as those for the poor. Most European nations provide, insure, or mandate higher levels of health care, childcare, employee benefits, and job security. They also generally levy higher taxes on their citizens, particularly on the wealthiest, to finance these programs.

In Hey, Big Spender! The Federal Budget and Fiscal Policy and Economic Growth, we will examine the role of the federal government in managing the economy. The government's role in addressing income inequality falls into the political realm, and this is not about political economics. Very few people, regardless of their political persuasion, want to see their fellow human beings in poverty. However, there is no political consensus on further addressing the effects of poverty in the United States.

Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

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