Studies of income inequality and the distributive effects of taxes and government spending drive debates over progressive fiscal reform and economic justice. These distributional studies provide vital information on inequality in market outcomes and how government policies mitigate these disparities.
Despite its critical importance, however, distributional analysis encounters inevitable and familiar limitations. These studies face practical challenges in measuring income and the distributional impacts of government policies. Distributional analysis also faces inherent complications in seeking to distinguish between the effects of the market and the government.
Even if distributional analysis could precisely measure income and the effects of government policies, these studies would still embed assumptions as to which measures of inequality matter. For example, the measure of market income used in distributional studies offers one possible measure of inequality. This measure, however, does not compare taxpayers’ disposable income available for discretionary consumption or savings, and therefore does not reflect accurately differences in household spending ability.
No methodology can offer an objectively correct way to perform distributive analysis. Because of their limitations, however, current distributional studies can understate inequality of household budgets. They can also overstate the distributive effects of government benefits to lower income individuals and understate benefits at the top of the distribution.
This Article introduces a new approach which yields a different assessment of income inequality and the effects of government policies. This method first deducts costs individuals incur for basic needs from the baseline of market income to construct what this Article terms a “basic needs baseline”. The method then assesses the distributive effects of explicit taxes and government spending from this new baseline. In effect, this methodology treats expenses for basic needs as implicit taxes or burdens from government inaction, when the government does not provide for them, rather than as affirmative benefits when the government does provide for them.
A basic needs baseline does not offer a “solution” to the measurement challenges and inherent limitations in distributional analysis. It does , however, offers a different — and valuable — measure of economic inequality and the effects of government policies. This method mo re accurately reflects the reality of differences in household budgets and redresses the imbalances in distributional analysis resulting from its unavoidable limitations.
© 2023 Brigham Young University Law Review
A Basic Needs Baseline for Distributional Analysis,
48 BYU L. Rev.
Available at: https://digitalcommons.law.byu.edu/lawreview/vol48/iss6/6