Income Inequality: Why It Stands in a Way of US Economy

Income inequality has been a point of discussion since the time of ancient Greek philosophers and is an increasing concern today for many Americans. Income inequality means that the money people earn is unevenly distributed among the total population. Personal income can be categorized in several ways; income from paychecks, income from providing a service, income from buying and selling things at a profit and income from investments like stocks, bonds and real estate. When income is not divided equally among the population, it can result in a small amount of income being shared by a large number of people while a huge amount of income is shared by a small number of people. The level of income inequality is often expressed using a Gini coefficient on a scale from zero to one where zero means that everyone has the same income and one means that all the income goes to a single person. For people at the low end of the income scale, they may receive a small paycheck with which they hope to buy sufficient food and pay enough bills to hold them to the next paycheck. Any amount of savings is small at best and investments are out of the question.

People at the high end of the income scale bring home huge paychecks, earn a significant amount of money from investments and continuously increase their wealth. Up to a certain level, income inequality is not entirely bad. For example, no one should expect an unskilled laborer to have the same income as a doctor. But even an unskilled laborer who is working hard should not have to live in poverty. Unfortunately, over a twenty-two-year period starting in nineteen eighty-six, there was a fifty-five percent increase in the number of Americans living in poverty (Cooke et al). During roughly the same period, the richest Americans increased their wealth over six percent every year (Glazer). If income inequality continues growing it will be bad for America because the very wealthy will gain too much political power, top earners will have an unfair educational advantage and the economy will become unstable.

One way that income inequality is bad for America is that it gives too much political power to the very wealthy. The result, as we have seen too often, is laws get created that benefit the wealthy at the expense of low and middle class citizens. The American government has turned into a plutocracy, which mean it is controlled by the wealthy. That was not the vision of our founding fathers who wanted all citizens to have a say in the laws, not just the upper class as it was in England where the “aristocratic” ruled the country (Glazer). The richest Americans now use their wealth to support politicians who will create tax laws that benefit top earners. Investments that mostly the rich can afford generate income called capital gains. Laws have been created that lower the taxes paid on capital gains resulting in tax cuts that benefit primarily the wealthy. Of course, lowering taxes on one type of income means that taxes must be raised on other types of income to make up the difference. The wealthy have used their political influence to raise payroll taxes, which affect the middle and lower classes far more than the wealthy who get most of their income from capital gains.

As if that wasn’t enough, the top income tax rate has been lowered considerably. Between the nineteen thirty and nineteen eighty, the top tax rate average was above eighty percent (Glazer). Since then, the top rate has been dropped many times to the benefit of mainly the very wealthy. The top tax rate is now well below forty percent. The result of all this is that billionaires are now paying an average tax rate of twenty three percent, which is “less than every other group” (Saez and Zucman). There are more laws that benefit only the very rich. Since billionaires can’t possibly spend all their wealth before they die, their children often inherit their money. Usually, whenever money changes hands, it is taxed. Estate laws created by the rich allow over eleven million dollars to be passed on to their beneficiaries exempt from being taxed (Krieg and Luhby). Additionally, if real estate holdings are inherited, any capital gains that would have been paid if it had been sold before the billionaire died are not subject to tax ever. If income inequality keeps growing, the situation will only get worse because the wealthiest people will continue using their political influence to pass laws that benefit themselves at the expense of the poor and middle class.

Another negative impact of income inequality is that gives an unfair educational advantage to the top earners. A good education is becoming increasingly important in today’s society. The number of low skilled jobs is decreasing due to automation and offshore manufacturing while at the same time the number of jobs requiring specialized skills is increasing. There used to be many high paying jobs available that didn’t require higher education but this is changing. To get paid a high salary now means additional skills must be learned through higher education. With very high income available to pay for education, the wealthy have no problem sending their children to the top schools to get the best education. This includes being able to afford expensive pre-schools, prep schools, extra-curricular activities and special tutoring for placement exams that gives them an advantage for getting into elite universities. Low-income families do not have the means to pay for all those advantages and therefore are not as likely to get into elite schools. Since the wealthy are able to afford better education, they also end up getting higher paying jobs. If income inequality keeps getting worse, it will turn into a “vicious cycle” where less and less people can afford the type of education it takes to get the best paying jobs (Rohde et al).

If income inequality continues to grow, it will also be bad for America because it will create an unstable economy. For all but the very rich, additional income results in additional spending and that helps the economy (Pettis). Very wealthy people are already spending as much as they want and additional income is not going to change the amount they spend in a way that helps the economy. The result is “reduced [economic] growth and inflation” (Lahart). Instead of spending more, the wealthy save more and use their additional income to make investments that will generate even more income that has the tax advantages discussed previously. With less income, the lower and middle classes are more likely to take out loans for housing and use credit for essential purchases. Since those with money to loan want to keep the economy growing they make it easy for the masses to go into more and more debt. While struggling to repay their loans, the poor have no spare income to make purchases besides the basics. The result is a slowdown in the economy as businesses suffer and factory production is lowered. “Economists Michael Kumhof, Romain Ranciere, and Pablo Winant” explained that a “large debt-to-income ratio generates financial fragility” that can lead to economic disasters like the 1929 stock market crash and the 2008 financial crisis (Pettis). If income inequality gets worse, the economy will become increasingly unstable as the masses have less and less spare income to spend and keep the economy growing.

Some people argue that income inequality is not bad for America. They contend that if the economy is growing then people at all income levels will benefit despite “rising wealth at the top” (Glazer). Unfortunately, the economy does not always grow and during those times of economic downturn, the wealthy can weather the storm while the rest suffer the worst financial consequences. Others contend that taxing the rich more will have a negative effect on the economy because they won’t invest as much in “job-producing activities” (Glazer). The problem with that theory is that any jobs that are produced are mostly minimum wage jobs so this this will actually make the income gap worse. Another claim defending incoming inequality is that the income of the middle class is rising at the same time as the upper class. While technically true, middle-class income is not rising anywhere near as fast as income of the upper class. In many cases, middle-class family income has gone up only because a “second earner” was added to the family (Katel). Additionally, income inequality is pushing more and more middle-class families into lower-class status.

The problems that arise from income inequality have been recognized for thousands of years. President Franklin Roosevelt recognized that income inequality should be curbed and we should prevent “enormously wealthy and economically powerful men” from controlling the country (Glazer). Unfortunately, too many elected officials have not had the same foresight and the problem of income inequality has gotten out of hand. By twenty-fourteen, the income of the top ten percent of American families had become greater than the income of the bottom fifty percent (Glazer). As income has gone up for the wealthy, the percentage of taxes they pay has gone down as explained in a recent Wall Street Journal article mentioning, “Warren Buffett bemoaning that he paid a lower average tax rate than his secretary” (Blinder). If more income can go to the poor and middle class, they will have a better chance of receiving the education required to get better paying jobs. Extra income will also give them more money to spend resulting in a growing, more stable economy. It is clear that income inequality is bad for America because of the political, educational and economic unfairness it causes. We need lawmakers that can reverse the trend and make America economically fair for everyone.