Cletus C. Coughlin and Thomas B. Mandelbaum analyze the flow of funds between the states and the federal government and conclude that changes in these flows have not been a major cause of the increasing inequality of state per capita incomes. More specifically, while federal transfer payments and taxes reduced the level of inequality, changes in their distribution did not contribute to the rising inequality. The evidence suggests, however, that changes in one major federal spending program—defense spending—may have been a minor factor contributing to the increasing inequality in this decade.