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3 Ways to Reduce the Wealth Gap
Last week, a Pew Research Center study indicated more bad news for America’s wealth gap. The study found Hispanics, Blacks, and Asians’ wealth lost an average of 57% since 2005 while whites’ wealth fell only 16%.
Income inequality has been rising and is at an 80 year high—the wealthiest 5% of earners now own more than the bottom 95% combined. A paper by two Northwestern economists found from 1971 to 2001 income for top 10% rose 34%, for the top 1% of earners rose 87%, for the top .1% income rose 181%, and for .01 income rose 497%.
Inequality has the potential to derail the United State's economy—economists from Alan Greenspan to Paul Krugman agree. But an unequal society doesn’t just hurt the economy—inequality is linked to corruption, social conflict, and a myriad of other negative social and political consequences.
Here are three ways the government can reduce the wealth gap.
1. Open higher education to everyone.
Economists have noted over the last 30 years, wages of workers with more education has increased faster than workers with less education. The economy has shifted from low education jobs to favoring high education jobs. For example, in 1979 a college graduate earned 38% more than a high school graduate. Now, the differential is 75%. This difference can also been seen in the unemployment rate—college graduates’ unemployment rate is about 5% compared to over 10% for non-college grads.
Higher education is an increasingly expensive undertaking and without more subsidies is unaffordable for many. Making higher education is available to everyone will increase college grads and thus reduce inequality.
2. Increase the minimum wage
This is a no-brainer. As income inequality has increased, wages for the lowest-earners have regressed. Increasing the minimum wage would improve the standard of living for the lowest earners and reduce the wealth gap.
3. Increase taxes on the rich.
Economic gains from last 40 years have overwhelmingly benefitted the rich. They’re not paying their fair share and can afford to pay more. Increasing taxes on the rich would make the tax system more progressive and increase available funding to the poor.
But taxes don’t just take money from the rich; they pack a powerful redistributive punch. Government transfers, like unemployment insurance, Social Security, and Medicare, are extremely progressive. Transfers represent 50% of the poorest 10%’s income.
Moreover, government spending on public goods tends to benefit the low-income and the middle-class disproportionately. Professor Wolff, of NYU’s economics department, estimates that government expenditures make up 70% of the poorest 10% income, but make up -16% of the richest income. This means, 70% the poorest 10%’s income is made up by government expenditures, whereas the richest 10% pays more in taxes than it receives in government benefits.
The United States had similar levels of inequality at the start of Franklin Roosevelt's first term. He favored the working class and through the New Deal sparked the greatest rise in middle-class incomes and economic growth the country has ever seen. His greatness did not come without sacrafice, though—he was called a "class traitor" by the rich.
But he "welcomed their hatred." Policy makers need to take a page out of Roosevelt's book and ditch their agenda of protecting the rich and do what's best for the many, not the few.
Posted in Fiscal Policy | Related Topics: Economic Growth Working / Middle Class Issues Poverty Tax Fairness
11 Comments
April 13, 2012 at 7:02 am
Back in 2005 there was the now infamous CitiBank “Plutonomy” memo. They document in pages of extensive detail how bad, how complete, the income inequality has become in the USA (and Britain.) They were showing high-net-worth clients how to make money off that. In it, they also outline the risks to the on-going plutonomy:
1) people can still vote
2) a change in the balance of power between capital and labor
I think we should heed their observations. Instead of wallowing in cynicism and resignation of “what I do doesn’t make a difference and therefore I’m justified in DOING nothing” ... it’s time to be active and vote. And we need to be voting for something that would correct (that off-balance) power shift towards capital caused by the global economy. By? Having laws that ensure labor gets a fair share. Example? “If you want to sell here, you will employ here.” All our competitors do versions of that… and have been taking our jobs for years and years. It’s time to admit to the real “rules” and be smart about how we play the global jobs game, too.
If you look at how US productivity (and corporate profits) have skyrocketed over the last decade in particular… and then see wages are totally stagnant… well, Capital likes it just like it is, getting all the gains. They will want “status quo.” What proportion of the American public really wants more of how things are now?
Have you looked at the Second Bill of Rights being proposed to “Win the Peace” by FDR? It was near the end of WWII, he didn’t want us to get into this situation again. We can only wish he had not died before he got it passed. Go check out his 2nd Bill of Rights… and remember that Citibank is accurate: We Do Have The Votes.
April 13, 2012 at 5:12 am
it is true ,but i also think there is need for education for all which is the best way of solving the difference without having the conflicts with the rich by increasing their tsxes
November 22, 2011 at 12:32 pm
John—I believe you are referring to the top 1% of earners as the rich? That is what the tax laws are aimed at. Well, the income for the top 1% start at $1,000,000/year, not $250,000. All of the top 1% have amillion a year, or more, to be considered rich.
To further clarify how I feel, I think our income tax system needs to be progressive. The higher your incoem the higher the percentage of income that has to be paid in taxes. Obviously, high income people have a larger percetage of their money to spend on discretionary items. The poor doesn’t.
November 22, 2011 at 12:05 pm
Hey Everybody. It’s not the wealthy that you want to increase the taxes for, that would greatly affect the middle class. The middle class are the people who start up small business, create jobs and industry .Since they may make more than $250000 a year we are going to call them wealthy and tax them to high hell?? They are so important to our economies. The people that should be taxed are the super rich people and gigantic companies like the pharmaceutics companies.
August 22, 2011 at 2:49 am
I think you’re uninformed. My father hadn’t a penny to his name, but he worked hard to get to where he is and he did it so that his own family could live a better life than he did. There was no inheritance involved. And as for ‘sending’ your kid in to the army, who does that? If your child wants to be a part of the army it should be a choice of his/her own, not a sentence from a parent. You honestly agree that losing 65% of your wage is fair game? Would you be in agreement if that’s what you were losing? I don’t think so.
August 17, 2011 at 10:17 pm
I think someone is uninformed here. 70% of wealth is inherited. Now, working your way out of the womb might be hard work, but hardly meriting inheriting millions.
Currently, the rich don’t even pay their fair share of taxes. They need to start. They should belaying a progressive rate, not a regressive one.
Then, maybe therichcan then start sending their kids tonight in the wars. They seem to coast a lot now.
August 16, 2011 at 12:24 am
The rich work their fair share to gain the money they do, so why should they be taxed more? They put in the work, so why should the benefits be taken away from them? Look at the UK - if you’re in the highest tax bracket you lose .65p of every £1 you earn - where is the just in that?
August 11, 2011 at 10:27 am
I don’t want anybody to take what I write here as a negative. What is being suggested is a good start. But only that. We must have trade policies that are conducive to employment here. For years we have let global competitors, especially those in Asia, play fast and loose. Millions of US jobs got sent overseas, and the income left with them. Just look at the trade deficit. THAT is where our prosperity went. What is being said in this would make a good fundamentals to support that change in trade policies. I am concerned that without that we-can-play-by-the-real-rules shift, these will not be enough. This is part of what is a Big Picture change that we Must Do. The enemies to our prosperity are not other Americans… despite attempts by certain elements to use that as a diversion… it is our naivete towards global trade.
KJC
P.S. I don’t recommend import duties and the like… that would likely spark a trade war where everbody would lose. We must be? Much more clever than that. This is a clear case where we can learn from the many tactics of our global competitors… “sauce for the goose, sauce for the gander” I say. And you?
August 8, 2011 at 4:43 pm
If you read this carefully, and think about what is said, so you understand completely, you will find this is a very good article.
Dan Conner says:
April 13, 2012 at 9:27 am
Anonymous, the wealthy work no harder than the cross section of the rest of the population. The difference is that they are rich. Taxes should be based on the amount of remuneration, not the amount of work. The amount of work one does is extremely subjective and not defined. On the other had amount of income is extremely objective and defined. Working 40, 60, or 80 hours a week is that and no more, whether you are rich or poor. If you don’t believe that, then I would like to see these rich people work some of the 60-hour weeks I see roofers working. I doubt they could survive.
Another think much of the income for the top 1% isn’t even from earnings, where one works for the money. Much of the money comes from capital gains, dividends, and interest. You don’t “work” for them.
Third, 70% of all the wealth in our nation is inherited. I know that isn’t “earned” or worked for. If we are looking to value work, then, maybe inheritance should be totally taxed away (100%). Then, we’ll see how truly hard and successfully the rich work.
Generally speaking, I consider the top 1% of income earners and wealthiest people to be spoiled and a net liability. It was this great country that offered them the opportunity to accumulate their wealth. They might better appreciate that if our country threatens to take it away.