In the year of the 250th anniversary of Jefferson’s Declaration, a growing share of the public believes capitalism has failed. Polls show socialism favored by 40 percent of Americans. A majority of college students view socialism positively or neutrally, and adults under 50 are significantly more likely to favor it than older generations, and a majority of college-educated adults under 50. But this shift is not driven by market failure. It is driven by measurement failure—statistical illusions that make government-engineered distortions look like defects in capitalism.
Two metrics dominate the narrative: the Gini coefficient and capital’s rising share of income. Both appear to show widening inequality. Neither reflects economic reality.
The official Gini coefficient measures pre-tax, pre-transfer income, ignoring the enormous equalizing effect of progressive taxation and government benefits. When consumption—the correct measure of well-being—is used, inequality is dramatically lower. Yet political rhetoric continues to rely on the flawed version because it justifies expanding the state.
The deeper problem is that the Gini coefficient is relative. Relative measures can never converge. Even if every income group doubles its consumption, the Gini can remain unchanged. This guarantees permanent grievance. A society can eliminate poverty, raise living standards across every decile, and still be labeled “unequal” because the metric is designed to find inequality even when material conditions improve. Redistributionists are never satisfied because the statistic they rely on ensures they never can be.
Capital’s rising share of income is equally misinterpreted. Traditional calculations ignore the decades-long shift toward non-monetary compensation such as employer-provided health insurance and retirement contributions. More important, the rise of pass-through business entities means millions of owner-operators have their labor income mislabeled as “capital returns.” What looks like capital dominating labor is often just labor being misclassified.
The real driver of inequality is not market competition but political intervention. A sprawling federal regulatory apparatus increasingly rewards proximity to Washington over productivity in the marketplace. The explosive growth of the corporate compliance industry—lawyers, consultants, auditors, and administrators hired to navigate federal mandates—diverts capital away from investment and wages. These roles do not expand the economic pie; they merely redistribute it. The result is a highly-credentialed managerial class whose compensation is inflated by regulation, not market value, while blue-collar workers bear the cost.
A related distortion comes from the growing enthusiasm for wealth taxes. These proposals rest on the same mistaken premise as the flawed inequality metrics: that accumulated private capital is a public resource. But a wealth tax is not a tax on income. It is a tax on already-taxed capital, built through decades of entrepreneurial risk-taking, saving, and intergenerational stewardship. Confiscating that capital is not a correction of market failure; it is the assertion that the state has a superior claim to the fruits of private effort.
The deeper problem is the absence of a limiting principle. Once the state asserts the authority to seize accumulated wealth simply because it exists, the rate becomes a matter of political appetite, not moral justification. If the state may take one percent, it may take twenty. If it may take twenty, it may take one hundred. Socialism has always rested on this absurdity: the belief that society can prosper by penalizing the very activities that create prosperity.
Demographic and educational trends amplify the problem. In the 1950s, only five percent of women earned undergraduate degrees. Today they earn nearly 60 percent. This shift has reshaped the political landscape. College-educated women are now the largest demographic favoring expansive government programs. The reasons are structural: delayed marriage, declining fertility, and extended periods of financial precarity before family formation all increase reliance on public institutions over private ones.
Higher education reinforces this trend. Federal student loan subsidies and expanding university administrations have structurally altered higher education economics, insulating institutions from traditional market discipline and driving up tuition costs. Critics argue that decoupling enrollment from strict academic readiness can lead to a mismatch effect that pushes struggling students into majors with lower market returns or leaves them facing severe dropout risks accompanied by non-dischargeable debt. (For more details, visit EPIC for America). The resulting financial strain produces a large population of indebted, underemployed graduates who have not yet formed families—the traditional catalyst for asset building and market-oriented politics. Many cluster in fields where government plays an outsized role and skepticism of markets is common.
History shows that markets, not mandates, drive upward mobility. As Thomas Sowell documented using pre-1964 Census data, minority communities were achieving substantial gains in income and poverty reduction before the modern welfare state. Strong families and robust labor-market participation powered that progress. The subsequent expansion of federal programs weakened those incentives, replacing a culture of self-reliance with one of political dependence.
Capitalism is a system in which labor and capital earn returns based on the value they create. When inequality rises, the first question should be: Who distorted the incentives? Today, the answer is clear. Congress—through regulatory proliferation, welfare expansion, subsidized educational failures, and wealth-tax proposals—has tilted the playing field.
Liberty is not preserved by guaranteeing outcomes. It is preserved by ensuring that individuals are free to rise through their own effort, unencumbered by a state that increasingly mistakes its own distortions for market failures.
