WASHINGTON, September 20, 2017 — Relative income inequality has increased significantly in America over the past 30 years. A small percentage of U.S. households have seen their incomes rise dramatically, while most Americans have seen little or no increase. Worse, the gap between the highest and the lowest income earners is growing.
The Obama administration popularized the income inequality issue, which became the basis for President Obama’s federal income tax policies as well as his handling of income maintenance programs. He thought he could reduce the income gap by raising taxes on the highest income earners while increasing transfer payment programs to the lowest income earners.
While Obama made the temporary Bush tax cuts permanent for most taxpayers, he raised taxes on the highest income earners by 10 percent. He also raised their capital gains tax rate by 59 percent, and raised their dividend income tax rate by 33 percent. This reduced the net income of the highest income earners.
At the same time, Obama increased the income of the lowest income earners by giving them more welfare payments, more food stamps and free healthcare. He reasoned that taking earned income away from those at the top and transferring it to those at the bottom would reduce income inequality.
In practice, this made income inequality worse.
The entire income inequality argument is a myth. The basic assumption behind it is that the amount of available income is fixed, hence letting the wealthy take more of the income pie leaves less available to the poorest.
The overall amount of income available in an economy is not fixed. The ability of some to earn high incomes does not reduce opportunities for those at the bottom to earn income. Income is not a zero-sum game.
The income inequality gap began to grow in the 1980s. By most measures, it continues to grow today. The Obama solution to the issue actually succeeded in making the income gap wider. A continuation of those policies will continue to widen it.
The primary causes of the widening income gap are technology, foreign trade and institutions.
Technology in the manufacturing process has reduced the demand for labor, particularly where labor is very expensive. This put downward pressure on future wage growth, resulting in an overall stagnation of wages.
Free trade with other countries also helped reduce the demand for America labor. Companies found they could produce at a much lower cost by making goods in countries where wage rates were 90 percent less than U.S. wage rates. This, too, put downward pressure on American wages.
From 1981 until 2008, there was a general push to deregulate industries and de-unionize much of the U.S. manufacturing sector. Both actions put downward pressure on wages. They also put downward pressure on prices, generally relieving American consumers of any inflationary pressure.
Beginning in 2009, President Obama sought to reverse these trends by adding more business and labor regulations, encouraging organized labor, raising the minimum wage where possible and reducing the returns on capital through higher tax rates.
The income inequality gap will not be reduced by federal taxing and spending policies. Inequality has worsened not because the wealthy are earning more, but because the lower income earners do not have the opportunity to earn more.
Obama’s policies served to stagnate the American economy. Obama is the first president to serve an entire term in office without experiencing at least one year of economic growth above 3 percent. Under his administration, the country averaged just over 2 percent annual growth for his entire eight years in office.
The reality is that America has a widening opportunity gap. A stagnant economy means that the most qualified workers still find opportunities, while low-skilled workers have little or none. This is what has made income inequality worse in this country.
The strong organized labor movement that began in earnest in the 1960s gave workers a false sense of security, encouraging them to believe there was no need for them to upgrade their skills. When technology was introduced to the production process, workers fought it instead of upgrading their skills to embrace it.
Under Obama, the over-regulated economy meant that it was tougher for business to expand. This also reduced opportunities, particularly for those already disadvantaged lower-skilled workers.
President Trump has the right answer. Virtually un-reported by the media, Trump is systematically removing as many counter-productive Obama-era regulations as possible. He is trying to reduce tax rates for all Americans, particularly for the small business people who, historically, create most of the job opportunities in this country. His primary goal is to increase economic growth to at least 4 percent per year.
Achieving that ambitious goal would provide greater opportunities for all well qualified Americans, and would also encourage other less-skilled workers to acquire the skills they need to become more qualified, thus attracting the attention of employers. Providing opportunity will lead to an increase in the demand for labor, which, in turn, raises wage rates and income everywhere on the economic scale.
By achieving this economically virtuous cycle, America’s income inequality problem will melt away faster than the snows of winter in the warm rays of spring’s welcome sun.