Economic Freedom and the Trade-off between Inequality and Growth

Studies | Economy

No. 309
Monday, March 31, 2008
by Gerald W. Scully


  1. Those readers interested in the more technical aspects of this paper should consult the Public Choice version.  Based on the paper by Gerald Scully, “Economic Freedom, Government Policy and the Trade-off Between Equity and Economic Growth,” Public Choice, Vol. 113, 2002, pages 77-96.
  2. Market failure is the concept that the solution produced by the market is non-optimal.  Such matters include monopoly, underinvestment or overinvestment in research and development, choice of the “wrong” technology, moral hazard in insurance markets, adverse selection, information asymmetries among buyers and sellers and so on.  Market failure does exist, but it is an overrated concept, and one that is used as a justification for state intervention.
  3. Arthur M. Okun, Equality and Efficiency (Washington, D.C.: Brookings Institution, 1975).
  4. From an economist’s perspective, the Dark Ages (the period from the fall of Rome in the fifth century to well into the Renaissance period) is a period of zero economic and social progress.  Living standards and life expectancy (among other social indicators) remained unchanged for a millennium.
  5. It is well known by economists and politicians alike that taking from the rich to give to the poor does not get one very far in the income redistribution game.  Confiscating Bill Gates’ fortune and giving a pro rata share to every other American would not buy a bag of groceries for each.  The real money is in the middle class, because they are so numerous.  That is why taxation and government benefits are concentrated in the middle class.
  6. The income tax was removed after the Civil War, and was not imposed on individuals again until 1913.
  7. British income taxation became so punitive after World War II that the tax rate exceeded 100 percent, thus requiring the wealthy to liquidate assets to pay the income tax bill.  In the United States, the highest marginal tax rates were 94 percent in 1944-45 and 92 percent in 1952-53.  Following the Americans (Ronald Reagan) and British (Margaret Thatcher) in the 1980s, many European nations cut their top marginal tax rates, but it is not uncommon that some still have maximum marginal rates of about 60 percent on a relatively low earnings base.
  8. James Gwartney, Robert Lawson and Walter Block, Economic Freedom of the World: 1975-1995 (Vancouver, B.C.: Fraser Institute, 1996).
  9. The countries in the sample are Australia, Belgium, Canada, Denmark, Finland, France, West Germany, Greece, Hong Kong, Ireland, Italy, Japan, South Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Taiwan, Thailand, the United Kingdom and the United States.
  10. The data on the Gini coefficients come from Klaus Deininger and Lyn Squire, “A new data set measuring income inequality,” World Bank Economic Review, Vol.10, 1996, pages 565-91.
  11. An income quintile is the percentage share of income held by 20 percent of the population.  The lowest income quintile is the income share of the 20 percent with the lowest income; the highest income quintile is the income share of those with the most income.
  12. A similar finding of the effect of economic liberty on the share of income of the highest income quintile for 70 nations is found in Gerald W. Scully, “Rights, Equity and Economic Efficiency,” Public Choice, Volume 68, 1991, pages 195-215.
  13. Statistical Abstract of the United States 1990 (Washington, D.C.: U.S. Government Printing Office, 1990), page 449.

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