Does Shrinking the State Really Make Us Richer and Fairer? A Deep Dive into 70+ Years of Data, Theory, and Simulated Futures

#Inequality #PublicSpending #ProgressiveTaxation #FiscalPolicy #Neoliberalism #Keynesian #DataDriven #UK #USA #EconPolicy #LinkedInResearch

Recently I worked on analysing 70+ years of data across the UK and the US — tracking how progressive taxes, government spending, and income inequality (via the Gini Index) moved together (or didn’t).

Didn’t stop there, but also tested neoliberal theories, Keynesian principles, and modern fiscal thinking against actual data. And then — I ran simulations to 2040 to model what would’ve happened if we’d done things differently.

Let’s just say… the results challenge some big assumptions.

What the Empirical Evidence Says:

Progressive Taxation Works

In both the UK and US, more progressive tax systems strongly correlate with lower income inequality.
In fact, it’s statistically significant in both — and dramatically more impactful in the UK.

Government Spending Alone? Not the Silver Bullet

The analysis shows that more spending doesn’t always equal less inequality — especially in the US.

What matters is where the money goes:

Welfare, health, education = equity gains.

Bailouts, defence, or unfocused spending = not so much.

What If We’d Kept 1960s Tax Progressivity?

For the sake of curiosity, I modelled it (presuming other factors constant), If the US had sustained its 1960s-level tax progressivity (think top marginal rates above 70%), the Gini Index would’ve been far lower for decades — even with unchanged spending.

Pair that with a 5% boost in social investment?

Inequality drops like a rock.

What the Theories Claim — and What the Data Says:

Neoliberal/Classical View:

“Smaller government means more efficiency, more growth, more opportunity.”
“Let the market lead, and inequality fixes itself.”

📉 Data Says:

Trickle-down is more drip-drip than waterfall.
Lower taxes and less government don’t automatically improve equity.
In fact, without progressive taxes and smart public spending, inequality just compounds.

Keynesian & Modern Fiscal Theory:

Government has a redistributive role — especially when markets concentrate wealth.
Social investments = stronger, more equitable societies.

📈 Data Says:

That holds up — when taxes are progressive, and spending is targeted.
A big government isn’t automatically good, but a smart government makes a difference.

Fast Forward to 2040: Three Simulated Futures

Actual (projected):

Inequality stabilizes at current levels. US remains high; UK holds moderate.

Progressive Policy Scenario:

High taxes + social investment → steady decline in inequality, especially in the US.

Tax Reform Without Spending:

Progressive taxes alone help — but inequality still grows if spending is NOT smart.

The Bottom Line: It Is About Applying Smart and Intentional Fiscal Policy!

It’s not about “big government” vs “small government.”
It’s about smart, intentional fiscal policy.

→ Progressive taxation reduces inequality — clearly and consistently.
→ Public investment matters — but only when it’s strategic.
→ Theory is great, but data and lived outcomes tell the real story.

Would love to hear your thoughts:

Should the government tax more and spend smarter — or scale back and let the market sort it out?

This blog should NOT be read as either an investment or a business advice, and it only represents the author’s views (Bahaa Arnouk) and does not represent any other body or organization perspectives, and the author has no liability for any reliance or reference made to it by any third party.

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