End trickle-down tax policies to reduce American wealth gap
The American Dream is the ability for any American, regardless of socioeconomic background, to achieve success. Today, economic inequality threatens to undermine the goal of equal opportunity. For the past 30 years, the gap between the rich and the poor has grown to the point where economic mobility for many low-income Americans is becoming increasingly unrealistic.
Before this current era of inequality, the United States experienced a rare period of economic prosperity which saw both the growth of the middle class and the reduction of wealth inequality from 1950 to 1980. It was made possible by government reforms instituted in the wake of the Great Depression and World War II which created the modern welfare state (policies which benefit the poor) and broke up old concentrations of wealth, many of which dated back to the Gilded Age of the late 1800s. Economic inequality was mitigated and the country was moving toward equal opportunity, but, like any period of economic or social improvement, it did not last forever.
From 1979 until 2007, the incomes of the wealthiest one percent grew 10 times faster than the incomes of the other 99 percent of the workforce according to the Economic Policy Institute. This is due in large part to “supply-side” or “trickle-down” economics, a modern-day conservative approach to government tax policy predicated on the idea that lower taxes encourage the rich to spend and invest more which, in turn, would increase economic growth. This ideology was the driving force behind the economic policies of the George W. Bush administration, such as the Bush tax cuts which significantly lowered capital gains and marginal tax rates for the wealthiest Americans. This increased the share of income collected by top income earners which, in turn, increased the gap between the rich and the poor. However, a series of studies conducted by the Federal Reserve from 2005 to 2010 show that the tax cuts ended up having little effect on economic growth.
There is nothing wrong with the rich getting richer, but when the rich add to their wealth at a much higher rate than the rest of the nation, problematic inequality arises.
President Barack Obama has extended the Bush tax cuts twice during his presidency as parts of compromises with Republicans, and, as a result, economic inequality is still one of the most important issues in our country today. As the gap between the rich and the poor continues to widen, it becomes harder and harder for future generations to undo the damage. When wealth disproportionately flows to the wealthiest individuals it becomes easier for those individuals to ensure that their children will have the opportunity to succeed, but lower-income families end up with fewer resources available to help their children succeed.
According to a White House study published in January of this year, rising inequality in educational attainment in recent decades is a result of income inequality. The fraction of high-income students completing college rose from 36 percent in the early 1980s to 54 percent in the late 1990s. The fraction of low-income students completing college during the same time periods only rose from five percent to nine percent. As a result of this disparity, the goal of achieving equal opportunity for all Americans has been undermined.
New findings in a New York Times article titled “Who Gets to Graduate?” by Paul Tough show that economic inequality has seriously disadvantaged many American college students from low-income families. The article states that there is a significantly higher graduation rate among students from well-off families than among students from low-income families enrolled in the same college, even if the students have similar abilities. For example, students with SAT scores in the range of 1,200-1,600 who come from families in the bottom income quartile have a 44 percent chance to graduate by the age of 24, while students with the same scores from families in the top income quartile have an 82 percent chance. In other words, smart students from poorer families are dropping out of college more and more frequently.
The article explains that students from low-income families face crushing pressures to succeed because they feel the need to elevate their families socioeconomic status. In addition, some of them have trouble adjusting to college environments which may be very different than schools in their neighborhoods. In essence, students who could benefit the most from college degrees are becoming less and less likely to earn them. Since a college degree is the best tool for economic mobility, this issue undermines the ability for many young citizens from low-income families to achieve the American Dream.
In his new book Capital in the 21st Century, economist Thomas Piketty argues that if we allow income inequality to continue rising at its current rate, it may usher in a period when the wealthiest citizens attain their wealth from their families rather than business ventures. In other words, the richest Americans in the country will make their money by being born into it. His calculations show that capital income has risen relative to national income at a rate not seen since before 1929. This could mean that the United States is headed back to the extreme wealth disparities of the 1920s which, in turn, led to the Great Depression.
The nation is clearly moving in a bad direction, a direction which threatens the ability of many Americans to achieve the American Dream. The question then becomes, what can we do to stop the tide of inequality? Surely there must be options that don’t include starting another war or causing another depression. Piketty proposes the long-term solution of a global tax on capital which would serve to lessen the automatic advantage that the wealthiest families have by simply reducing their income. Instituting such a tax at the international level is unrealistic. However, on the national level, the Obama administration has made a goal of instituting a similar tax on the wealthy. His efforts have been stymied by partisan gridlock in Washington D.C., which is unfortunate because such a tax would go a long way in reversing the tide of inequality in this country. The tax would help close the gap between the richest and poorest citizens as well as giving the government more money to invest which, in turn, increases Gross Domestic Product (the overall rate of economic growth).
The most simple, albeit not the easiest, solution is to increase the overall rate of economic growth. Both liberals and conservatives have proposed endless solutions to increase gross domestic product. One of the simpler approaches to increasing the economic growth rate is to increase the population growth rate. As the population grows, it can be expected that some of the new members of society will produce output, bring new skills and ideas into the workforce, and inevitably start businesses of their own. One way the government can increase the population is immigration reform which has received a rare amount of bipartisan support in Congress recently. At this point, it might be the only solution that both parties can agree on to stymie the ever-growing gap between the rich and the poor.
The success of the American Dream is measured by the ability of citizens from adverse economic backgrounds to make a better future for themselves. If we do not work to fix the issue of economic inequality soon, it threatens to undermine the very ideals which have separated the United States from the rest of the world for centuries.