A question from Yahoo! Answers:
What are some plausible ways in which the issue of Income Inequality in the US can be eliminated (to an extent)? ex. Should the tax system be altered, how so?, can this problem be solved through the negative tax, workfare, or cash transfer programs?
Historically, income inequality in the U.S. has been positively related to immigration and negatively related to inflation and the strength of the unions.
Tax system could potentially be altered to reduce the income inequality somewhat (more progressive income taxation, introduction of wealth taxes, entitlements for low-income families with children, etc.), but it any of these measures would have at least some negative consequences.
Entitlements for low-income families with children have been tried before and turned out to be an incentive to produce more (poorly reared) children rather than take better care of children families already have.
More progressive income taxation and wealth taxes would not have much of a negative short-term effect, but will lead to slower capital accumulation in the long-run. Back in 1981, Laurence Kotlikoff and Lawrence Summers published a paper (Kotlikoff, Laurence J. and Summers, Lawrence H. “The Role of Intergenerational Transfers in Aggregate Capital Accumulation,” Journal of Political Economy, Vol. 89, No. 4, (August 1981), pp. 706-732), which showed that capital accumulation happens largely through inheritance. Smaller fortunes today, therefore, could easily lead to the decrease in the number of the proverbial “good jobs” in twenty or thirty years. One can even argue that the “junk job explosion” of today is directly related to income inequality reaching its historic low in the 1970s…