Income inequality is often associated with negative things such as decreased quality of life and a lack of social mobility. Yet, the lower classes are receiving less and less of the United States’ overall income while the top earners’ share is increasing. Why? This paper will explore causes of the growing income inequality as well as possible solutions to slowing it down. The income inequality gap has been growing over the past few decades, according to a study done by K. A. Bryan and L. Martinez.
They not only recognize that the gap has been growing, but that lower income groups haven’t had a significant increase in inequality since the 1980s. Therefore, while their income has been growing minimally, the top income groups have been increasing in inequality tremendously. According to the Congressional Budget Office, from 1979 to 2007 in the U. S. , the top one percent of households’ after-tax income increased by 275%. While the bottom 20% grew by 18%. Income inequality has grown due to the unbalanced growth of the lower quintiles as opposed to the top one percent of households.
Per 2015 Census data, the lowest quintile of household income earners is 72. 1% white, 22. 6% black, 5. 3% Asian and 13. 2% Hispanic. Of the races, Black was most likely to be in the lowest quintile of household income. Hispanic was most likely in the second lowest quintile, while White and Asian were most likely to be in the highest quintile. Another interesting statistic is that 68% of the lowest quintile did not work that year. In comparison, 13. 4% of the top quintile did not work.
We know the lower quintile of household income isn’t increasing nearly as much as the one percent and that the inequality gap in the United States has been growing since the 1970s. What has the lower quantile of household income in the United States of America been going through to cause such little income growth? These three studies look at key factors to answering this question such as inflation adjusted income, tax policy and the distribution of income. The first study, done by Kim and Tebaldi, attempts to identify sources of income inequality in the United States.
Already recognizing that income inequality has been increasing over the years and the associated negative connotations that come with it, they wanted to breakdown sources of income inequality. This paper uses the March supplement U. S. Current Population Survey (CPS) data from 1994 to 2012 taken from the IPUMS-CPS to calculate the Gini coefficient. The Gini coefficient is as follows, G={_(k=1}^k. R_k G_k S_k. Where R_k is the Gini correlation between income source k and total income, G_kis the relative Gini of source k, (5 ] _k is source k’s share of total income, and k is the source of income.
G is the Gini coefficient of total income inequality before the income change. This shows how changes in certain income sources will affect overall income inequality. The larger the coefficient, the more inequality. They found that the Gini coefficient had increased, with a strong correlation to earned income as a source. They also found that an increase in transfer income reduces income inequality most significantly among all income sources. The finally conclude that better training programs and education are required to increase the lower groups’ earned income and potentially remedy the increasing income inequality.
The next paper, written by Thomas L. Hungerford, examined the effect of certain tax policies in America and their effect on income inequality. Specifically, between 1996 and 2006. Hungerford brings up the 2001 and 2003 Bush tax cuts a couple of times as an example for of a tax policy that could affect income inequality and possibly an inspiration for the study. He also relays how the study of tax policy has gone all the way back to Adam Smith in 1776. He bases his own research, off previous analysts have discerned that income mobility has decreased and or remained unchanged since the 1970s.
This study once again used the Gini coefficient and shares of income before and after taxes. Specifically, they compared 1996 to 2006 using public IRS SOI files. This allowed them to examine how well taxes were lowering inequality based on the before and after tax income shares and Gini coefficient. In this study, they found that inflation adjusted income actually fell for the poorest 20% of tax filers but almost doubled for the richest 0. 1%. Leading to an increase in income inequality. They also found that the tax policy in 2006 increased inequality more than the tax policy in 1996 due to the cuts made for the top 0. %. The paper also says that capital gains and dividends were the single largest contributor to rising income inequality between 1996 and 2006. The paper concludes that although tax policy has increased inequality significantly, income inequality would most likely rise regardless of tax policy.
What about other factors often seen as causes of income inequality? Factors such as corruption, unemployment, and education level? This study by Apergis, Dincer, and Payne looks for the relationship between these factors and income inequality in the short run and the long run. hey based his study off a previous study finding a positive relationship between poverty and income inequality. Meaning that the more poverty in an area, the higher the income inequality. Payne used annual data from 1980 to 2004 for every state in the US. This study used data from the Bureau of Economic Analysis, the Bureau of Labor Statistics and the National Center for Education Statistics. They then performed a statistical t-test for every factor’s significance in determining poverty and income inequality.
They found a significant impact on income inequality from the unemployment rate, level of education, real per capita personal income, and poverty. However, corruption was deemed to have an insignificant relationship with income inequality. This paper argues that instead of fighting income inequality, it would be more beneficial to fight poverty, therefore creating less income inequality. Here are a few definitions used in this paper. When referring to the lower quintile of income earners or households, it means the lowest income earning 20% of tax filers. The top quintile subsequently, refers to the top income earning 20% of tax filers.
Outsourcing is to obtain goods or a service from an outside or foreign supplier, typically in place of an internal source. Tax policy is used in this paper to refer to any legislation in place affecting the percentage of income tax paid by any class. Finally, education in this paper refers to postsecondary schooling such as college and technical institutes. From the Census data, we know that 68% of individuals in the lower quintile did not work in the past year. This coincides with two public issues, the unemployment rate and the outsourcing of jobs, the former being shown to have a significant impact on income inequality.
If an individual had been working at a plant creating clothing, that job has likely been outsourced leaving them jobless. Contributing to the unemployment rate if they’re still looking for work. Another source of significant impact on income inequality from the third study is education. An individual would have personal trouble if they do not have proper education for a higher paying job. As we know, education is a key factor in increasing income and class mobility. If this includes college, the individual may not be able to afford the cost of tuition, since their income is already so low.
That leaves the public with the issue in deciding to lower tuition costs or not. However an individual may be able to attain education through scholarships and other financial aid. As seen in the first study, education and other training programs are important to increase earned income for the lower quintile. Currently the lower quintile is earning less today than they did in the seventies. Which is a public issue to create well-paying jobs for the lower quintile. This relates to the subject of outsourcing brought up earlier since many of those well-paying jobs have been outsourced.
In order to lower tuition costs, the government would have to fund it through income tax. As we saw in the second study, tax policy in 2006 had increased income inequality from 1996. However, how is an individual supposed to change tax policy? The only way they can is to vote for a representative who’ll change the tax policy but that is one lower quintile vote versus funding from the top quintile and the top quintile’s one vote. Not to mention, if you are a lower quintile income earner, you’re most likely busy trying to get out of that quintile to pay attention to politics.
I’ve taken an economics class every semester so far in my time at k-state and I find it very fascinating. So, during the previous election cycle, proposed health care and tax policies were often examined in classes. We spent most of our time talking about how the upper classes continue to grow rapidly, leaving the lower classes in the dust. However, we never really looked into why the lower classes weren’t growing as quickly. It was implied the reasons for their lack of growth were similar to the reasons behind their lack of class mobility or rooted in wealth inequality.
I struggled the most in this paper with finding research that had more findings than lower quintile workers earned more in the seventies than in present day. A lot of papers just reaffirmed that finding in a different way. Although most of the papers brought up that point, that was also what I found most interesting about the topic because I hadn’t known that until researching this topic. I hope to learn more about less conservative tax policies and their effect on inequality since most of the papers I read focused on either the Bush tax cuts or the Reagan tax cuts.
