The Debate Over Income Inequality and Taxes

Income inequality is a hotly debated issue in the United States. Income inequality refers to a significant financial difference between the richest workers in the economy versus the poorest. When discussing income inequality, wages are not the only factor that is considered. Investment earning, real estate expenses and rent are all considered as well.

While some form of income inequality has always existed, many studies show the gap is widening. In 2018, reports showed the top 20% of the population earned a little over 50% of all income in the United States. Even when looking at only the top 20% of the population, income inequality exists, with the top 10% earning significantly more than the bottom percent.

Income Inequality and Taxes

There are many issues related to income inequality, but for many, the biggest issue relates to taxes. In the United States, the tax code was structured around your personal income. In theory, the more money you make each year, the more you pay in taxes. However, some of the richest people in the world either pay severely reduced taxes, and in many cases, they end up paying significantly less than taxpayers in lower brackets.

While the economy has always been a relevant election topic, it has received a renewed interest in the last few years, specifically centered around income inequality and taxes. Some candidates, such as Elizabeth Warren, proposed a scaling tax increase for households reporting over $50 million each year, with an even higher tax for households reporting over $1 billion. Other candidates proposed making changes to the tax law, such as increasing the estate tax hike or adding additional tax rates for millionaires.

Many of these policies were proposed in response to the 2017 changes in the tax code, which critics argued favored the rich. The biggest criticism centered around the change to the top tax bracket. Previously, taxpayers int his bracket paid 39.6 percent in taxes each year, but the 2017 Tax Cuts and Jobs Act changed this to 37 percent.

On paper, this may not seem like a significant change, but when you're dealing with larger quantities of money, even a slight change in percentages can make a big difference. There are also many other tax benefits available to the top earners, so taxpayers in lower brackets were unhappy even more benefits were being provided to the top earners.

Why Income Inequality is an Important Issue

Some critics try and dismiss or downplay the effects of income inequality. A common argument these critics attempt to use is making it sound like taxpayers in lower brackets are only complaining because they want to pay less in taxes, or even out of jealousy for those who are more successful. However, there are serious issues affiliated with income inequality.

Studies show that in countries with income inequality, there is also a significant gap in quality of life. This leads to issues including children doing worse in school, a lower life expectancy, increased incarceration rates and an increase in mental illnesses.

It is becoming harder for critics to dismiss income inequality. Early in 2020, both Republican and Democratic voters were polled and asked what their top five issues were for the upcoming election. 72% of the participants reported income equality was their number one issue.

What caused the spike in income inequality?

Income inequality was not caused by one sole factor. There are numerous reasons for an increase in income inequality. One of the biggest changes in recent years comes from the way technology has changed the working landscape. Due to technological advancements, some jobs are either no longer in high demand, leading to reduced wages for workers in these fields, or in some cases, technological advancements completely eliminated professions.

Many of these reduced or eliminated roles belonged to middle-class workers. By reducing these roles, companies significantly cut down on costs. These savings typically go to the higher ranked employees, who were already making more than the majority of employees.

Changes in technology has also had an impact on the global market. Companies are able to hire employees from other countries or import supplies they previously bought in the United States. This again results in the company taking all the money they save and funneling it to the higher ranked employees, furthering the wage gap.

Tax Laws

There are several tax laws which favor the rich. Wealthy taxpayers often use charitable donations to significantly decrease how much they owe in taxes. When the 2017 tax laws changed, the amount you are allowed to deduct for charitable donations also increased, going from 50 to 60 percent. However, taxpayers in lower brackets rarely benefit from this, since they either do not have a large enough income to donate to charity, or their lower income means their charitable donations only give a minor deduction.

Another advantage rich taxpayers have with charitable laws has to do with what they donate. Taxpayers are allowed to donate more than money. A popular tactic by wealthy taxpayers is to work alongside charitable groups without physically donating money. For example, some taxpayers partner with nonprofit land conservation groups to make positive environmental changes to their property.

Many wealthy taxpayers also benefit from investing in stocks. Stocks use different tax laws compared to earned income. If you sell at the right time, you pay significantly less in taxes. Wealthy taxpayers have a much easier time investing in stocks compared to lower income taxpayers, who are largely living from paycheck to paycheck and do not have the same investment opportunities.

Proposed Solutions for Income Inequality

Unfortunately, there is no simple solution to fix income inequality. Many politicians acknowledge it is a problem, but there is often a disagreement on what can be done to lessen the gap. As of writing, there are two commonly proposed fixes. One is improving or creating better education and employment training for the lower and middle class. Advocates for this proposal believe having more skilled and educated workers will provide employees access to better paying jobs.

The other population solution is to either raise taxes on the higher brackets and also impose stricter tax regulations to cut down on how wealthy taxpayers are able to get deductions. A recent regulation, the Dodd-Frank Wall Street Reform Act, was put into place to help Congress track how much employees make. The goal of this act was to help Congress track where the income inequality is coming from to come up with better solutions to protect employees who are in lower paying positions.

Sources
CNBC | The Balance | PEW Research | Market Watch