WASHINGTON, February 14, 2016 — President Obama helped launch the current discussion about income inequality. Presidential candidates Hillary Clinton and Bernie Sanders—especially Sanders—constantly remind the public that income inequality has worsened in the last eight years. They suggest taxing the highest income earners and transferring the income to those who haven’t earned it, in the form of free tuition, student debt relief and other social programs.
But the real problem is not income inequality; the problem is increased poverty and a stagnant economy.
The non-partisan Tax Policy Center says that the top 1 percent of income earners, while earning 17% of personal income, paid 46% of personal income taxes in 2014. That’s up from 43% in 2013 and 40% in 2012.
It is true that the 1 percent’s income has risen significantly, which along with the higher federal income and capital gain tax rates, explains why they are paying more tax dollars. Still, how much more should they pay before Sanders calls it their “fair share?”
Many economists and other scholars cite studies showing that countries with less income inequality have fewer social problems resulting in reduced crime rates, higher life expectancies, lower rates for teenage pregnancies, less racial discrimination and fewer drug problems. They also note that income inequality creates the perception that the system is rigged.
But the reality is that income inequality is the symptom, not the problem. The problem is that those at the low end of the income scale are losing income, which creates more poverty. The lower end of the middle class is also seeing declining income.
The solution is to provide opportunity for those at the bottom to earn income to lift themselves out of poverty. The federal government is doing just the opposite by creating an environment which discourages people to seek employment. It is now easy to collect welfare, food stamps, housing payments and free health care. Sanders would extend these wrong policies.
Even Sanders admits that part of the solution is to create good paying jobs for all Americans. He is not specific about how to do this, but we know productive, good-paying jobs are created by an expansion in the business sector. If that expansion is profitable, business will hire more workers, even if they have to pay more to get them. The result is more people working with higher wages.
Successful business owners and entrepreneurs are generally higher income earners. By raising their taxes and raising the taxes on corporate America, after-tax income is reduced, leaving less capital for expansion. Obama has raised the tax rate on capital gains by more than 50 percent, further reducing new capital for expansion.
Some very learned economists say that there is no relationship between lower taxes and economic growth. They conclude that the highest tax rate could be more than 80 percent and not hurt economic growth. With all due respect, that is a bunch of poppycock.
Consider an individual who has life savings of $100,000 and an opportunity to invest in a risky venture that he could sell in a few years for $200,000, yielding a $100,000 profit. The tax rate could determine whether or not that investment, which benefits the investor and expands the economy, was made.
If the tax rate were 80 percent he would keep only $20,000 of his profit, making the investment unattractive, especially considering he could earn almost as much investing in very low risk municipal bonds. If, on the other hand, the tax rate were 15 percent, he would keep $85,000, motivating him to make the investment and giving him more capital to re-invest in the future.
Higher tax rates reduce investment and slow economic growth. Government policy should set economic growth as its primary goal. Economic growth will provide jobs for the unemployed while raising wages, thus bringing more people into the workforce. This reduces the need for an expanded safety net. It also gives people a sense of self-esteem instead of a feeling of dependence. Receiving government hand-outs discourages people from working and encourages the idle, unproductive time that leads to more social problems.
To solve income inequality, we need policies designed to pick up people at the bottom rather than pull down those at the top. The people at the bottom need opportunity, not hand-outs. Economic growth will the provide the opportunity that eventually reduces income inequality.