1Running head: A CRITICAL ANALYSIS OF INCOME INEQUALITY3A CRITICAL ANALYSIS OF INCOME INEQUALITY

A Critical Analysis of Income Inequality in AmericaGrant GishIUPUI

AbstractThis paper seeks to determine an effective solution (or effective solutions) to income inequality. It examines a variety of online sources, from online magazines to online research reports. It begins by establishing the problem with a recent history and current data for income inequality. The paper then works to understand the causes and effects of income inequality in order to know what issues need to be addressed when evaluating four different solutions. The solutions were picked based on popularity, as they are solutions often given by professionals or the general public. The paper approaches each solution with a non-biased perspective and seeks to find the advantages and disadvantages of each as well as bring to light details not often thought about when proposing these solutions. Keywords: income inequality, taxes, minimum wage, education

A Critical Analysis of Income Inequality in AmericaThe United States has the highest income inequality of all democracies in the developed world (Zuckerman, 2015). The issue is becoming increasingly more noticed by Americans, who are turning toward the leaders of the country and the top one percent to assign blame. As Mortimer Zuckerman says, The public has moved beyond the plaintive cry of feel our pain to the more angry pronouncement of you are causing our pain. It is easy to blame the top one percent, but first, the issue must be thoroughly examined to fully determine the history, causes, and effects of income inequality. Various solutions exist for this issue, but each must be critically analyzed to determine the most effective one(s). After extensive research in order to fully understand income inequality and its solutions, it is apparent the most effective solution is educating low-skilled workers. Recent History and Current StatisticsIncome inequality is no new issue to America. Since 1979, the median of wages (adjusted for inflation) have fallen or risen only slightly. As a result, real median earnings today are the same as in 1980. Inequality appears to be independent of what political party is in power, as incomes in 2014 are twenty-one hundred dollars lower than in 2009 (when President Obama took office) and thirty-six hundred dollars lower than in 2001 (when President Bush took office). Despite this, the average income in America is rising (Zuckerman, 2015). To understand why, observe the following graph:

Figure 1. Average after tax income. This figure graphs average after tax income for different percentiles (Gardner & Abraham, n.d.).

As the graph shows, the income of the top one percent is rising at exponentially higher rates than the rest of Americas income. Even the top five percent cannot keep pace with the top one percent. Average income in America is not increasing because the poor are earning more, but instead is increasing because of the rich getting richer (Gardner & Abraham, n.d.). As a result, the top one percent are beginning to control Americas wealth. In 1944, the top one percent earned just eleven percent of income. As of 2012, that number has risen to twenty three percent of income (Zuckerman, 2015). The gap between the rich and the poor in America is only increasing. What is causing this huge gap between the top one percent and the other ninety-nine?Causes of Income InequalityIncome inequality has a number of causes, including increasing imports, low productivity growth resulting in a decrease in high paying jobs and an increase in low paying jobs, and CEOs cutting wages expenses (laying off workers).Cause One: Increasing ImportsIn 1990, the automotive industry imported about thirty-two billion dollars in parts. Last year, it imported one hundred and thirty-eight billion dollars, a four hundred and thirty-five percent increase over less than twenty-five years. Increased imports result in less jobs for Americans, meaning less expenses for businesses and higher unemployment which combine to result in greater income inequality in America. Harvard Business School found that businesses outsource or use automation because of high corporate taxes and high employee health care costs, both popular solutions to help eliminate income inequality. These solutions appear, however, to only be increasing income inequality (Zuckerman, 2015).Cause Two: Low Productivity GrowthCompared to the rest of the world, the U.S. has very low productivity growth at about one-point-six percent each year. The consequence, according to Zuckerman, is low-wage, part-time jobs replacing high-wage, full-time jobs. He then backs up his claim later by stating, The number of full-time jobs last year was two-point-three million below where it was back at its peak in 2007. Todays jobs are twenty-three percent lower in pay than the vanished jobs, according to the U.S. Conference of Mayors and HIS Global Insight. The Atlantic agrees with Zuckermans claim, presenting further evidence through their graph:

Figure 2. Jobs lost and gained. This figure shows jobs lost and gained for varying wage levels (The Atlantic, 2014).

While the exact cause of Americas low productivity growth is unknown, the results are detrimental to the middle and lower class. As less high-wage jobs and more low-wage jobs become available, the income of the majority decreases, consumer spending decreases, and the U.S. economy suffers (The Atlantic, 2014).Cause Three: CEOs Cutting Wage ExpensesA large percentage of the top one percent is made up of CEOs, whose pay is rising at incredible rates for alarming reasons. In 2009, CEO pay was double the average CEO pay for the 1990s, quadruple the average in the 1980s, and eight times the average for mid-twentieth century decades. However, it appears one of the main ways CEOs are increasing their pay is by cutting wage expenses. The top fifty CEOs who cut wages the most earned forty-two percent more than the average S&P 500 Company CEO (Gardner & Abraham, n.d.). Not only is the top one percent beginning to control the wealth, they appear to be thriving at the expense of others.

Effects of Income InequalityIncome inequality has detrimental effects to both the American people and the American economy through stagnant wages and lower economic growth. Effect One: Stagnant WagesIn a recent poll from the Pew Research Center, fifty percent of Americans say their incomes are not keeping pace with the increases in the cost of living, while only five percent say their incomes are increasing more quickly than the cost of living. In fact, according to the poll, Forty-five percent of Americans said they have lived through one serious financial hardship over the last year, an event such as a job loss, falling behind in bills, or not being able to afford medical care (Zuckerman, 2015). Wages are becoming more and more stagnant, as shown in the following graph:When Figure 3 is compared to Figure 4, it is interesting that the highest rates of wage growth were during years when the top one percent was earning its smallest share of pre-tax income. There appears to be a negative correlation between the growth of average American wages and the wages of the top one percent (Gardner & Abraham, n.d.). If this is true, then while the incomes of the top one percent increase, millions of Americans struggle to pay the bills as a result.Figure 3. Real average hourly wages. This graph shows the trends in real average hourly wages from 1947-2011 (Gardner & Abraham, n.d.).

Effect Two: Lower Economic GrowthIncome inequality has significant negative impacts on Americas economic growth, according to both the International Monetary Fund and the Organization for Economic Co-Operation and Development (OECD). Inequality also results in a shrinking middle class and, according to Washington University in St. Louis, A depleted middle class can lead to a downturn in demand for goods and services, a bad outcome for businesses and the economy as a whole. To see evidence of income inequality effecting economic growth, one must simply look at history. Here is a graph of the top one percents share of total pre-tax income from 1913-2012:Figure 4. Share of Pre-Tax Income. This graph shows what percent of pre-tax income the top one percent have by year (Gardner & Abraham, n.d.).

The graph shows a fascinating relationship between the state of the U.S. economy and the level of income inequality. The highest level of income inequality in this graph was in 1928, the year the Great Depression began. The second highest level was in 2007, the year the Great Recession began. Meanwhile, income inequality was at its lowest during the 1950s-1970s, a time of great economic success in America. Through Figure 5, it is easy to see the relationship between high income inequality and a low economic growth in America (Gardner & Abraham, n.d.). Figure 4, of course, raises the question, What does it mean that the top one percents share of pre-tax income is once again reaching levels where economic collapse soon followed? If this is an indicator of hard times to come for America, the effects of income inequality must be alleviated. Solutions for Income InequalityA variety of solutions exist for income inequality, with the most popular being the rich spreading their wealth, taxing the rich, raising the minimum wage, and educating low-skilled workers.Solution One: The Rich Should Spread Their WealthMany people look at the rich and say, Why dont they donate more? They have so much and others have so little. According to The Atlantic, The wealth of the worlds one thousand six hundred forty-six billionaires combined is five-point-four trillion dollars a third of U.S. yearly GDP while there are eight hundred and seventy million people living in extreme poverty. Oxfam calculated that the revenues from a one-point-five percent tax on the wealth of the worlds billionaires could save twenty-three million lives if put into healthcare, or put every child in the world into school if used for education (The Atlantic, 2014). Upon hearing this, it is especially hard to accept that the rich hold on to so much of their money. After all, if they would all just donate one-point-five percent of their wealth it could forever change the world. However, wealth distribution is not a technique that has worked in the past. It must be remembered that the top one percent earned their money and often invest more time than the average person to get to where they are. In fact, one percenters are three times as likely to work over fifty hours a week as the other ninety-nine percent (Dewan & Gebeloff, 2012). Also, the top one percent is already responsible for thirty percent of philanthropic giving (Conover, 2012). Additionally, many of the top one percent are business owners, meaning they employ hundreds or thousands of workers. The top one percent already spread their wealth in various ways, so it is difficult to encourage them to get rid of their hard-earned money. Adam Katz, a one percenter who creates jobs and gives to charitable causes, said it best: [The ninety-nine vs. one battle] shouldnt be relevant. Im not hurting anyone. Im helping a lot of people (Dewan & Gebeloff, 2012).

Solution Two: Tax the RichSo, if the rich wont donate more of their money, why doesnt America just take it from them? Forty-nine percent of Americans believe raising taxes could help reduce income inequality, according to the Pew Research Center. Professional organizations like the Economic Policy Institute claim taxing the rich would reduce income inequality (The Atlantic, 2014). Even almost all of the one percenters interviewed for Dewan and Gabeloffs article in the New York Times said, The wealthy could and should shoulder more of the countrys financial burden, and almost all said they viewed the current system as unfair. With this overwhelming support, why not tax the rich?Because it wont work. Thomas Piketty wrote Capital in the Twenty-First Century, where one solution he presents to solve income inequality in the U.S. is an eighty percent tax rate on incomes above five hundred thousand or one million dollars or a fifty-to-sixty percent tax rate on incomes above two hundred thousand dollars (while this may seem outrageous, France actually recently instituted a seventy-five percent income tax rate for top earners, although it was reversed about a year later). Tax Foundations Taxes and Growth model calculated the economic effects of these tax brackets through changes in costs of labor and costs of capital (taxfoundation.org, n.d.) Pikettys proposed tax rates would decrease GDP by almost six hundred billion dollars, decrease the wage by over one-point-five percent, and cause the economy to lose over two million jobs. This calculation assumes no change to capital gains and dividends. If they were to also be taxed, GDP would drop almost three trillion dollars, wage rate would drop almost fifteen percent, and the economy would lose almost five million jobs (Schuyler, 2014). Obviously, this is not a route we should pursue. Chris Conover, in his article in Forbes magazine, approached this solution a little more logically. In 2009, the top one percent earned thirteen-point-four percent of U.S. income but covered thirty-eight-point-seven percent of federal income taxes. Compared to the average American household, the top one percent made just less than sixteen times as much income but paid more than forty times as much in federal income taxes. With all other taxes factored in, the top one percent pays twenty-two-point-three percent of federal taxes. Each one percenter pays twenty three times as much as the average American household, which is about three hundred and thirty thousand dollars. Now, if the U.S. were to increase taxes further, the top one percent can move out of the country and renounce their citizenship (which happened in France). As a result, the bottom ninety-nine percent would have to pay at least sixty-three percent higher federal income taxes to make up for the lost tax revenue. Raising the taxes of the rich is not a good solution. Solution 3: Raise the Minimum WageOver sixty percent of America is in favor of raising the minimum wage (Zuckerman, 2015). While in theory this provides more money to low-income families, the reality is not so. Only about two percent of American workers earn minimum wage or below (Patton, 2014). Over seventy-five percent of these minimum wage workers above twenty-five years old are above the poverty line, and just sixteen-point-five percent of minimum wage earners are single parents. According to the American Legislative Exchange Council, studies have shown an absence of a relationship between raising the minimum wage and decreasing poverty. Some low-skilled workers benefit, but some lose work hours or their jobs. In fact, increased minimum wage can decline the GDP lower-skilled workers generate. If employers have to pay more for employees, they want to make sure they have higher quality employees. This would cause more lower-skilled workers to be unemployed. The Council states, Raising the minimum wage favors those who already have jobs at the expense of the unemployed. Also, when minimum wage has increased in the past, the businesses affected most (in a negative way) by the increase were businesses that hired low-income workers and businesses that had a large percentile of low-income customers (Council, 2014). Mike Patton, in his article in Forbes, calculates that an increase in the minimum wage from seven dollars and twenty-five cents an hour to fifteen dollars an hour results in a total increase in U.S. GDP of only just over one percent, assuming all extra income is spent (which it wont be). He also agrees that raising the minimum wage will not help low-skilled workers, as it could result in job cuts and increased automation to help reduce expenses (Patton, 2014). After an increase in minimum wage, there are more unemployed low-skilled workers. As the American Legislative Exchange Council says, Increasing the minimum wage will hurt the exact people it is meant to help. Solution Four: Educate Low-Skilled WorkersEducation is the most effective solution to income inequality. Brad Hershbein, Melissa Kearney, and Lawrence Summers of Brookings Institution calculated what would happen if there were a ten percent increase in B.A. attainment among males aged twenty-five to sixty-four. They found that if this were to happen, it would almost entirely wipe out the reduction in median wages that has been experienced from 1979 to 2013. While education will not decrease the wages of the top, it will increase the wages at the bottom (White, 2015), and Hershbein et al. found that increased education will benefit the twenty-fifth percentile the greatest. The following tables show their findings:

Figure 5. Increased earnings. This table shows the increase in earnings resulting from increased education (Hershbein, Kearney, & Summers, 2015).

Figure 6. Wage percentile ratios. This table shows the changes in wage percentile ratios from increased education (Hershbein, Kearney, & Summers, 2015).

As the tables show, a ten percent increase in B.A. attainment would increase the twenty-fifth percentiles wages by over thirty-three percent and also lower the wage ratios between all percentiles. Hershbein et al. conclude, Our nation should aim to increase the educational attainment and, more generally, the skills of less-educated and lower-income individuals because in the long run, this is almost surely the most effective and direct way to increase their economic security, reduce poverty, and expand upward mobility."

ConclusionIncome inequality has been an issue in the United States for decades. However, it is more complex than it first appears. With causes such as increasing imports, low productivity growth resulting in a decrease in high paying jobs and an increase in low paying jobs, and CEOs cutting wages expenses (laying off workers) and effects such as stagnant wages and lower economic growth, income inequality is an incredibly difficult issue to solve. Although some inequality may always be present, there are different popular solutions that exist to alleviate its effects and lower the level of inequality. While the rich spreading their wealth, taxing the rich, and raising the minimum wage all have possible upsides, the risk of each is too great. The most effective solution is the education of low-skilled workers. Not only will this significantly raise the bottom twenty-fifth percentiles incomes, it will lower wage ratios between all percentiles. This is a solution America needs to take seriously, whether through providing funds for low-income, low-skilled workers to receive an education or through marketing the benefits of higher education to the entire country. U.S. President Barack Obama in regards to this issue stated: We have an obligation and a responsibility to be investing in our students We must make sure that people who have the grades, the desire and the will, but not the money, can still get the best education possible.

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