Most folks who keep up with economic news that income inequality has been increasing in the US and wages for average Joe workers has been stagnant for about 3 decades. The wage increase for workers in 2017 was at its highest in years at a whopping 2.5%.
Our income inequality in the USA is higher than other developed countries. Rich countries tend to have less income income inequality than developing countries with the exception of the USA.
One reason for the high income inequality in the U.S. can be explained by its redistribution and imperfect tax system. According to a 2013 research paper, top tax rates in the U.S. have moved in the opposite direction from top pre-tax income shares for a few decades, supported by the belief that rewarding top earners might spur more growth and entrepreneurship. I bet this “trickle down economics” sounds familiar. The republicans passed another “trickle down economics tax cuts bill this past December 2017.
This trickle down economics tax cuts was first promoted by President Ronald Reagan and his republican administration in 1981.
Many supply-siders use the economic growth in the mid-1980s as an example to advocate for cutting tax rates further. But the rest of the story is that President Ronald Reagan had to raise taxes 11 times after the 1981 tax cuts during his presidency in order to be fiscally responsible.
On the other hand, President George Bush’s administration proposed and Congress enacted a set of supply-side-focused tax cuts in 2001 and 2003 that some have blamed for the Great Recession in 2008.
As per a 9/27/17 Politico report by Tyler Fisher, “The Congressional Research Service published a paper in 2012 that found no correlation between top tax rates and economic growth. Congressional Republicans protested the findings, and the service briefly withdrew the paper.”
Here’s the rest of the story as to how trickle down economics tax cuts contributes to the widening US income inequality…
On December 4, 2017, Dylan Scott and Alvin Chang of VOX penned the following report, “The Republican tax bill will exacerbate income inequality in America”
“America’s rich have gotten richer for decades, while the middle class and poor have seen meager gains. Since the mid-20th century, the top 1 percent have more than doubled their share of the nation’s income, from less than 10 percent to more than 20 percent.”
“Donald Trump said he was going to fix it — that he would represent the forgotten men and women, the people who had been left behind in this widening of income inequality.”
“But the tax overhaul his Republican Party passed through the Senate early Saturday morning would make America’s income inequality worse. Maybe a lot worse, economists say.”
“The bill is investing heavily in the wealthy and their children — by boosting the value of their stock portfolios, creating new loopholes for them to avoid tax on their labor income, and cutting taxes on massive inheritances,” Lily Batchelder, a New York University professor who worked as an economist under President Barack Obama, said. “At the same time, it leaves low- and middle-income workers with even fewer resources to invest in their children, and increases the number of Americans without health insurance.”
“The centerpiece of the Republican tax plan is a massive corporate tax cut, from 35 percent to 20 percent, which is expected to disproportionately benefit the wealthy. Shares of stock in the businesses that pay corporate income are mostly owned by the wealthy, and the top executives whose compensation packages are linked to stock market performance are also much richer than the average American. So the bill’s cut in the corporate tax rate is going to help them the most.”
“It would also overhaul the individual tax code in a way that almost every independent analysis has shown would direct most of the benefits to the wealthy. In 2019, a person in the bottom 10 percent gets a $50 tax cut and a person in the top 1 percent gets a $34,000 tax cut.”
“Other provisions, like rolling back the estate tax, are unambiguous giveaways to the richest Americans.”
“It exacerbates preexisting and longstanding trends, rather than aiming to partially compensate for them,” William Gale, co-director of the Tax Policy Center who served as a senior economist under President George H.W. Bush, said.”
“At the same time, millions of poor and middle-class people are expected to see their taxes either stay the same or actually increase in the long run. Right away, the groups getting the biggest cuts are toward the top of the scale, according to the nonpartisan Tax Policy Center:”
If you fast-forward to 2027, the picture is much grimmer. Senate Republicans are allowing many of the individual tax breaks to expire in 2026 to meet the Senate budget rules, banking on a future Congress extending them. But that leaves the more regressive corporate tax cuts as the bill’s dependable legacy. As written, by 2027 the law’s results are shockingly unequal:
And by repealing Obamacare’s individual mandate, an estimated 13 million fewer Americans are expected to have insurance and federal spending on Medicaid and other subsidies would drop.
The clear story of the Republican tax plan is that it takes the wheel of America’s already-dramatic income inequality and presses the accelerator.
“The bill makes the economic playing field even more tilted toward the most fortunate,” Batchelder said, “which means over time the distributional effects of the bill will be even worse than these estimates suggest.”
Income inequality was already growing in the United States
The top earning Americans have always earned the lion’s share of income in this country. But in the past half-century, more and more of that income has gone to the top.
From 1979 to 2013, the share of after-tax income held by the top fifth of earners has grown by 6.5 percentage points, while the share held by the bottom fifth has dropped by 1.2 percentage points:
If we home in on just the top 1 percent, this group has seen an especially large growth in their income share since the 1980s.
“This is a group that will benefit greatly from the Republican tax bill because it slashes the corporate tax rate, cuts taxes for “pass-through” businesses, lowers the top individual tax rate, and includes other provisions like rolling back the estate tax on large inheritances.”
“The corporate tax cut in particular, the nonnegotiable centerpiece of the bill, will benefit the wealthy, who earn far more of their income from business and investments than other Americans.”
“Republicans are also looking to slash taxes for “pass-through” businesses, which are increasingly used by the wealthiest Americans to lighten their tax burden. These pass-through businesses earn more than traditional corporations.”
And the top 1 percent earned more and more money through pass-through businesses, which helped them earn a bigger share of the pie.
“This is why most of the money earned through “pass-through” businesses goes to the top 1 percent, including the Trump Organization. Those businesses would also see their taxes cut under the Republican tax bills.”
Americans know income inequality is getting worse, and they want it fixed
“The American people have noticed these trends, more and more of the nation’s wealth accumulating with the richest people. Democrats and Republicans agree on this.”
“Most of them think it needs to be addressed imminently. A 2015 New York Times poll found 65 percent thought the growing gap between the rich and the poor needed to be addressed immediately. Only 17 percent said it wasn’t a problem.”
“A majority of Americans think that taxes should be raised on corporations and a plurality support raising taxes on people with higher incomes.”
But the Republican tax bill, despite Trump’s promises to present the forgotten Americans, doesn’t do either of those things.
“Instead, it would dramatically reduce taxes on corporations and pass-through businesses, where most of the money is with the top 1 percent, would also get a big tax cut. The bill’s individual tax cuts would largely benefit the wealthiest people, while the poorest Americans could actually see a tax increase eventually under the GOP plan.”
The Republican tax bill will make pre-tax income inequality worse, too
“In pure dollars, here’s how much the Republican tax bill cuts taxes for Americans in each income group by 2019:”
By 2025, the disparity is even wider.
“That’s just the raw dollar amounts.”
“The Republican counter to these arguments would be that a big corporate tax cut would benefit everybody, because businesses would then invest more money in the economy, increasing wages and employment for all of us.”
“But our already-worsening inequality belies this argument. As Emmanuel Saez and Gabriel Zucman, economics professors at the University of California Berkeley, wrote:”
“Republicans will noisily claim that cutting taxes on wealthy business owners will boost economic growth and end up benefitting workers down the income ladder. The idea is that if the government taxes the rich less, the wealthy will save more, grow U.S. capital stock and investment, and make workers more productive. The evolution of growth and inequality over the past three decades makes such a claim ludicrous. Since 1980, taxes paid by the wealthy have fallen dramatically and income at the top of the distribution has boomed, but gains for the rest of the population have been paltry. Average national income per adult has grown by only 1.4 percent per year—a poor performance by both historical and international standards.”
“As a result, the share of national income going to the top 1 percent has doubled from 10 percent to more than 20 percent, while income accrued by the bottom 50 percent has been almost halved, from 20 percent to 12.5 percent. There has been no growth at all in the average pretax income of the bottom half of the population over the past 40 years—during which trickle-down enthusiasts promised just the opposite. Now they’re doing it again. Will we listen?”
“And if you step back and look at the ways the Republican tax bills could reshape American society and the world, the risks for deepening inequality rise.”
“It starts, as always, with the massive corporate tax cut at the heart of the bill.”
“At the global level, it implies that the US has renounced the idea of taxing multinationals properly. It will accelerate the trend toward lowering corporate tax rates around the world,” he said. “This means that the gains from globalization will skew even more toward wealthy multinational shareholders instead of the public. This is the reverse of what we need at a time of populist backlash against inequitable gains from globalization in advanced economies.”
“Then you have tax changes that affect Americans before they ever file a tax return, “Less noted is the potentially growing effect that the legislation could have on pre-tax income inequality, which is to say the amount people earn,” Jason Furman, who led the Council of Economic Advisers under Obama, told Vox.
“Republicans want to end tax breaks for students and universities. The bill will increase the federal deficit, which will put pressure on future Congresses to cut spending on programs that benefit the poor and middle class. States and cities, with the end of the federal tax deduction for their taxes, could cut also programs and hike their taxes in such a way that they hit people with lower incomes. Republicans are also rolling back the estate tax, which will help the wealthiest families remain permanently at the top.”
“Furman summarized five ways the Republican tax bill could, beyond the obvious, deepen inequality:”
1. Raising taxes on students, universities and training would have a disproportionate impact on access to more moderate-income students, reducing their upward mobility.
2. At the same time, estate tax cuts or repeal would further expand the opportunities of the most affluent.
3. Reducing or eliminating the state and local tax deduction would lead many states to cut taxes and with them cut services like education, training and the like that help to boost incomes and reduce inequality. States and localities could also shift more of their tax base to more regressive sales taxes.
4. The larger federal deficit will come at the expense of other government transfers for middle/bottom households and/or programs like education, nutrition assistance and Medicaid that have all demonstrated a tremendous impact on upward mobility.
5. More speculatively, cutting the tax rate on monopoly profits could help reduce competition with further consequences for inequality and growth.
As for Trump’s forgotten people, they are still left behind.
Links to related article: Income Inequality – Inequality.org/2016