Will Raising Minimum Wages & Raising Taxes On The Rich Solve Income Inequality?

Will Raising Minimum Wages & Raising Taxes On The Rich Solve Income Inequality

There is an increasing anger among the majority of the people in the country towards the American establishment, the mainstream American politicians and both the political parties. The rise and growing popularity of unconventional politicians with varied ideologies and outlook to the future of the United States in both the Republican and the Democratic Parties may be explained, to some extent, due to this growing frustration among the middle class and the poor in the country.

Income inequality is one of the major global issues talked about today. It is the bane of the working class’s existence. It’s more evident in the United States today than ever before. In the US, income inequality increased the most among all the developed nations – the richest 1% growing by 275%, while wages of the poor grew by only 20% in 30 years. The Forbes 400 list of the richest Americans, states that the total net worth of those on the list in 1982, the first year the list was compiled, was $93 billion. In 2014, that number was $2.3 trillion, up 2,400%. At the same time, median household income in the United States rose only about 180%.

The American middle class has been shrinking relative to upper- and lower-income groups, both of which represent bigger shares of the population than at any time since at least 1971, a new Pew Research Center report finds. The increased income inequality since the 1980s is due to a decreasing real minimum wage, which means, the real wages were growing slower than inflation, contributing to increase in the inequality.

Shawn Donnan of the Financial Times says, “We’re seeing a real divergence in American society. What’s interesting about these numbers that have come out from the Pew Research Center and that we’ve built our series around is that, really, this is the broadest measure in terms of income of the American middle class out there.”

In inflation-adjusted terms, the real value of the minimum wage is lower today than it was at its late-1960s peak. This decline in the real value of the minimum wage, coupled with the decline in unionization and the rise of automation, accounted for much of the growth in income inequality in the 1980s.

While there is a push to increase the minimum wages, there is also a demand to increasing income taxes on top earners, and in turn giving those funds to those on the bottom. Both income inequality and the minimum wage have become hot-button political issues in recent years, particularly since the rise of the Fight for $15 campaign. Democratic presidential hopefuls Hillary Clinton and Bernie Sanders talk about income inequality as a major economic problem and advocate for raising the minimum wage as one possible solution for the issue.

It sounds like simple math, and has an allure for many politicians and American families alike, but a new Brookings research suggests that this proposal would actually do little to reduce inequality.

This growing inequality has immense consequences for the nation’s future. As the children of the rich are getting better services, and in turn, a higher likelihood of social and cognitive development, which means that they are more likely to take up the high paying executive positions than the others, whose parents are perhaps not so lucky. Unequal starting points only mean that the finishing points will be unequal as well. The exact cause of income inequality is up for debate.

Kim Weeden, director of the Center for the Study of Inequality at Cornell University, says while raising the minimum wage will unlikely decrease the levels of income inequality, it would make a huge difference for those struggling to make ends meet.

However, there are those in the Republican Party and others, who think that increasing the minimum wages will not help in diminishing income inequality. According to Heritage Foundation expert James Sherk, labor economists have found no correlation between higher minimum wages and lower poverty. Raising the minimum wage simply would not reduce poverty.

Sherk says, raising the minimum wage will not affect many poor families. Higher minimum wages cost some workers their jobs. Raising the minimum wage makes these entry-level jobs harder to find. That makes it harder for less skilled workers to gain the skills necessary to get ahead. And finally, the raising wages will disqualify millions from receiving federal grants that are eligible to them now. As workers’ incomes rise they qualify for less and less aid—effectively an additional tax on their income.

Another suggestion put forth is to tax the rich more. It’s a popular idea on the 2016 campaign trail, but a new study says that won’t do much to dent inequality in America. Many of America’s uber rich, including billionaires Warren Buffett and Jamie Dimon, have said they would be willing to pay more in tax.

Bernie Sanders has proposed a “billionaire surtax” of 10% that he says would only impact the nation’s 530 billionaires. He also wants to increase the inheritance tax — what people pay when they transfer land or money to their kids — from 40% to a top rate of 55%. Donald Trump, Jeb Bush and Hillary Clinton have all proposed eliminating the “carried interest loophole” that allows many hedge fund managers to tax their investment income at a lower tax rate (20% versus 39.6%).

A new paper from Brookings Economics Studies found that raising the top income tax rate to 50 percent would mean an additional $6,464 in taxes owed for households in the 95-99th percentiles of income and an additional $110,968 for households in the top 1 percent. Extremely wealthy households in the very top 0.1 percent could expect to experience an average income tax increase of $568,617. As per the analysis, increasing the top marginal tax rates for those in the 95th percentile and up had a “trivial effect on overall income inequality.” only lowering the gap modestly.

Researchers looked at what would happen if all the extra money raised from the tax hike on the rich were given to America’s poorest. Lower-income families would receive about $2,650 a year, they found. That kind of redistribution would lessen inequality a little bit more, but the country would still remain far more unequal than it was in the 1970s.

The reality is that that tax hikes for top earners could raise critical revenue for the federal government, and redistribution policies would still provide substantial benefits to low-income households, if not economic mobility as a whole.

The need to close the gap between the rich and the poor and according the majority poor, lower middle class and the middle class their right to thrive is a basic necessity. They need to be able to meet their daily needs and offering them resources to grow and become productive citizens rather than become a burden on the nation, means, investing in the present by raising the minimum the income, redistributing the wealth of the nation to invest in the products and services that will enhance the quality of the lives every citizen.

 

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