Taxation and income inequality have gradually become frontrunners in the political arena, especially throughout the last presidential election. Our nation’s deficits have grown at an alarmingly fast pace over the last fifteen years, and everyone has a solution. On one hand, Democrats want to dramatically increase taxes on the top one percent to reduce the national debt and income inequality in addition to spurring domestic growth. On the other hand, Republicans argue that such tax hikes will stymie economic growth and reduce trickle-down benefits. Both parties presumably have our country’s best interests at heart. However, what the American people need is a more specialized taxation policy that not only targets our massive deficit but also attempts to equalize income and wealth across the population.
Over the last fifteen years, the U.S. economy has not been at its best. It has suffered from diminishing growth rates as well as the Great Recession and its subsequent expenses. Following two costly wars in the Middle East, the Great Recession’s industry bailouts, 2009 stimulus package, and unemployment benefits all drove the U.S. economy into further disarray. Furthermore, Bush-era tax cuts and healthcare expenditures that exceeded projections added to not only the national deficit but also the income inequality that is prevalent today.
Bush-era tax cuts amplified overall income inequality and increased the national deficit by trillions of dollars. By insufficiently taxing the wealthiest Americans, national debt reduction depends far too much on decreases in government spending, which ultimately hurt low- and middle-income citizens. The Bush-era mentality that tax cuts will stimulate the economy, produce jobs, and sustain trickle-down benefits is incorrect. Decreases in taxation actually reduce the government’s ability to invest money for growth in areas like education, healthcare, and infrastructure.
Increasing taxes on the extraordinarily wealthy will increase tax revenues that would then hopefully be used to reduce the national debt and stimulate growth. In order for these tax hikes to make a noticeable difference though, government spending would have to decrease simultaneously. Unfortunately, these tax increases on high-income households would not have a meaningful effect on income inequality within the United States.
The Brookings Institute performed a simulation of what would occur if the United States raised income taxes on its highest earners under three different scenarios. The outcome shown by the Gini coefficient for each percentage increase was that the tax increases would only have a “trivial effect” on overall income inequality.
With the proposed tax increases displayed above, the Gini coefficient fluctuated by less than .01, remaining around .57, which means that there would be little to no change in overall income inequality. The fact that such a large rise in the upper echelon tax bracket resulted in such a small decrease in inequality exemplifies how merely raising the wealthy’s taxes will not eliminate income inequality.
The U.S. should consider utilization of a specialized contractionary fiscal policy in its attempts to bridge the income inequality gap. By levying and raising certain taxes, the government could increase its tax revenues without completely stagnating economic growth with traditional contractionary fiscal policy. An example of this specific targeting would be to hike wealth taxes, namely the estate tax. Wealth is more concentrated in upper echelon brackets than income itself. The estate tax abatement aids the wealthiest 0.3 percent of estates and will have incurred revenue losses of $155 billion by 2022. Another option would be to collect higher taxes from higher-income taxpayers and limit deductions. In addition, the government could attempt to raise low- and middle-class incomes through income tax credits. This would hopefully increase spending and investment amongst families looking to grow and get ahead.
The taxation and income inequality debate is far from over, especially with such a controversial incumbent president. It will be fascinating to see how he and his cabinet tackle these important issues our country faces.