Income is the amount of money a person receives from all sources, earned or not. It includes paychecks, dividends, retirement benefits, food stamps, unemployment benefits, subsidies, etc.
The Gini coefficient is a measure of income distribution in a country. It ranges from 0 to 1 and all numbers between. A Gini coefficient of 0 means a country has perfect equality; everyone receives the same income. A Gini coefficient of 1 means a nation has perfect inequality; 1 person receives 100% of the income.
In other words, a lower Gini coefficient means there's a smaller income gap between rich and poor. A higher number means the opposite.
For reference, if the Gini coefficient of a nation is 0.6, it means the richest 20% of the population receives 80% of the income. If the wealthiest 1% receives 50% of the income, then the Gini coefficient will be at least 0.49.
According to the OECD, the United States has a Gini coefficient of 0.5 before taxes and public spending and 0.4 after taxes and transfers.
Progressive taxation always lowers the Gini coefficient, making it an effective way to reduce inequality. I provide more evidence for this later and propose a new tax system tied to the Gini coefficient.
No country has ever had a Gini coefficient of exactly 0 or 1. Dictatorships are probably the closest to 1 that countries have ever come. The Scandinavian nations are probably the closest to 0 that countries have ever come.
Nobody wants a Gini coefficient anywhere near 1. If a wealthy minority takes most of the income, then everyone else will be poor and largely excluded from the market. A country with high inequality will have few competing businesses. That's because most people will lack sufficient capital to create their own firms. They won't even be able to afford basic things like healthcare, transportation, or an education. The dominant companies will use their disproportionate share of national income to influence politicians disproportionately. These legislators will give the megacorporations competitive advantages over everyone else. Wealthy individuals will get more tax cuts, and their companies will receive more subsidies and special privileges. If the country is libertarian, then the oligarchs will simply buy a new government. This will be easier for them since they already possess most of the nation's income.
Suffice it to say, high inequality is not conducive to a free market.
Though a Gini coefficient of 0 sounds better, it isn't good either. Having at least some inequality provides people with an incentive to work harder and smarter. That way they can receive more compensation for their labor. Why become a doctor or a scientist if neither of those professions pays more than a custodian?
Cuba used to pay everyone the same wage, and it didn't work well.
Furthermore, creating a business requires saving up money and capital. That requires at least some inequality. If no one could own more property or save more money than anyone else, investing in and creating businesses would be impossible.
Individuals that work harder and smarter should receive a larger share of national income, though only up to a point. A CEO doesn't labor hundreds of times harder than a secretary, and therefore, shouldn't receive orders of magnitude more in income.
Though perfect income equality isn't desirable, there's evidence that countries with more equitable income distributions have better living standards. The following is a list of nations' Gini coefficients among the OECD [1]. These figures are after taxes and transfers. Countries are listed by lowest to highest Gini coefficient (most equal to least equal).
Denmark (DK) 0.249
Slovakia (SK) 0.250
Norway (NO) 0.253
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Improving Our Standard of Living (Wattpad Edition)
Non-FictionThis book is about how to reduce poverty and improve global living standards. Topics include economic growth, income inequality, corruption, sustainable development, the future of technology, and much more. Below is a sample of questions answered th...
