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  Workers' Rights  Poverty  Tax Fairness 

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