Abstract

We use three conventional inequality indices—the Gini, the coefficient of variation of income, and the relative mean deviation of income—and the Atkinson index to examine the effect of income tax rates, the minimum wage, and all the major government welfare and transfer programs on the evolution of income inequality for rural and urban areas by state from 1981-1997. We find that these programs have qualitatively similar but quantitatively different effects on urban and rural areas. Most importantly, taxes are more effective in redistributing income in urban than in rural areas, while welfare and other government transfer programs play a relatively larger role in rural area. Effect of Government Policies on Urban and Rural Income Inequality Although income inequality has increased substantially in both urban and rural areas of the United States over the past two decades, the levels of inequality in these areas have evolved differently. We investigate whether these alternate paths are due to different responses to changes in taxes, minimum wage laws, social insurance policies, and transfer programs. We find that government policies have had qualitatively similar but quantitatively different effects on rural and urban areas. 1