Monday, February 10, 2014

The focus on inequality in America

     Today, there is a lot of focus on inequality, particularly from more liberal news sources such as the Huffington Post, Time Magazine, and MSBC. The President in the State of the Union Address as well as during other occasions, proposed solutions such as raising the minimum wage and increasing taxes on the wealthy.  Although income equality sounds like a wonderful goal for society, it can be a poor measurement of the prosperity of the society.  A society in which all citizens are poor is very equal but less prosperous than one that has a wide range of incomes from rich to poor.  Focusing on income equality alone leads to economic conditions that help the poor at the expense of mean income and wealth for the entire society. Some of these misguided measures taken to enhance economic equality are artificially raising wages higher than market value, and placing an excessively high tax burden on the wealthy.  The United States should not trade in the prosperity of the entire nation to achieve income equality.

   Even though inequality is rising, social mobility is not declining. According to a large Harvard economic study, social mobility has stayed constant over the past half century. The president has stated that social mobility is getting worse, when in fact it is not. This reveals a fundamental flaw in his world view of inequality, which in turn should make one take any solution he proposes with a grain of salt.

      Income equality is not necessary a good way of measuring prosperity. Using the Gini coefficient as a way of measuring inequality, with 100 being complete unequal and 0 being completely equal, the U.S. is in the highest third with a rating of 45.0. Canada, Australia, Sweden and Norway are often seen as models of wealth and/or income inequality. Canada comes is in the bottom half with a rating of 32.1, Australia in the bottom forth with a rating of 30.0 Norway 5th lowest with a rating of 25.0, and Sweden being the most equal with a rating of 23.0. Despite its high income inequality, the United States ranked first in the OECD, with a mean Household adjusted disposable income of $38,001. Norway comes in with $31,459, Australia with $28,884, Canada with 28,194, and Sweden with $26,242. The point is greater income inequality does not always translate into greater average income. In mean Household financial wealth, the U.S. outperforms its peers even more. The U.S. has $115,918, Canada with $63,852, Sweden with $44,889, Australia with $32,178, and Norway with a mere $6,905. Once again, greater wealth equality does not mean greater wealth. Yes, the U.S. has significantly higher poverty rates then these countries, but for the most part people in the U.S. make more and have more money than in every other OECD country. The stats show income equality is not a good way of showing how well people in a country are doing.

     What about the President's specific solutions for enhancing economic equality such as raising the minimum wage and increasing taxes on the wealthy? Are these good ideas? Raising the minimum wage to $10.50 an hour, as the president has proposed, would not be much relief. It would only be a annual income of $21,480 assuming the employee works full time. This is still below the poverty line for a family of four. Raising the minimum wage much higher would likely cause companies to not hire as many young workers, leading to high youth unemployment rates as seen across southern Europe.  In addition, one would expect companies that are forced to pay higher wages to pass off the increased expense to the consumer.

       Raising taxes on the wealthy is not a good idea either.  In March of 2013, the top 10% of American earners made 45% of the nation's income, but paid 70% of the income taxes. Proponents of higher taxes on high earners often focus on the wealthy paying their fair share. However, they are actually paying over one and a half times their fair share.  While income tax accounts for about 47% of the total, this is the only type of individual tax that is progressive, and thus is the only one that can be changed for only a certain group of earners. However, in 2012, the bottom 50% of earners paid only 2% of income taxes. Raising taxes on only the top income bracket is also inefficient. Were it to be raised 1% point on only them, from 2014-2018 tax revenue would rise about $38 billion, while if it were to be raised 1% point on all income tax brackets, tax revenue would rise $287 billion from 2014-2018.

     In summary, economic equality is a lofty ideal that does not work well in the real world.  European countries have more income equality but lower incomes and wealth than the United States. Moreover, the specific measures that the President is proposing to enhance equality are unhelpful and perhaps harmful to the economy.  Raising the minimum wage might help a small number of workers by a small amount, but corporations would be forced to compensate for the increased expense by hiring fewer workers and increasing prices that consumers pay for goods.  Increasing taxes on the wealthy is not nearly as efficient in raising tax revenue as raising taxes on all citizens.  In addition, the wealthy already pay more than their fair share of taxes.  The President should not focus on the deceptive goal of greater economic equality.  Rather he should focus on strengthening the economy as a whole.

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