S&P report proves higher wages and taxes worsen income inequality

Standard & Poors
Standard & Poors

WASHINGTON, August 5, 2014 – Rating Agency Standard & Poor’s published a study today saying empirical evidence suggests that widening income inequality is reducing economic growth. They note that since 1913, the income of the very wealthy has increased by a factor of seven while it increased by a factor of 3 for the remaining workers.They note that this growing income gap slows economic growth.

The data suggests they are right. But how should government policy react to this?

It is interesting to note that the comparison by S &P begins in 1913, the year that the progressive federal income tax was passed. The progressive tax meant that as income increases the tax rate increases, so that the wealthy pay a higher rate than those earning less income.

The thought was that this would raise revenue for the government while refraining from causing economic harm to the average worker as well as reducing income inequality. It appears that the results were the opposite.

The current administration’s solution to this is to raise the taxes on the wealthy and increase transfer payments from social programs to those at the lowest income level. This should reduce income inequality, they reason.

Again, the result is exactly the opposite, as income inequality has worsened.

S & P notes that high taxes on business tends to cause business to hire fewer workers which worsens income inequality. Because the Affordable Care Act essentially taxes small business, job creation is meager.

Although we have had many consecutive months of positive job creation, the number of jobs actually created is very low. During past recoveries the economy typically added 300,000 to 400,000 jobs per months.

After the 1981 recession there were two months where the economy created about 1 million new jobs.

The administration wants to raise the minimum wage in an effort to help raise the income of the lowest income earners. This too will make income inequality worse. While it is true that those with minimum wages jobs will see an increase in wages, there will be a large number of jobs lost as business simply will not hire a worker who produces $7 an hour worth of output when the government says this worker must be paid $10 per hour.

Even at today’s minimum wage the unemployment rate for teenagers exceeds 20% and will worsen as the minimum wage is raised.

S & P also notes that more education usually translates into higher wages.

Yet we have a primary education system that is extremely costly due to disproportionately high wages of teachers and overall poor performance.

By reducing the cost through wage moderation and improving the quality of teaching, those in the lowest income classes can “educate their way out” as many of our civil rights leaders have noted. Most wealthy people got there because they made substantial contributions to the economic system.

Therefore, the way to reduce income inequality is not by taking from those who have earned it and giving to those who have not, but rather by allowing those that earn it to keep most of what they earn and by giving the opportunity to all Americans to make significant contributions to earn income themselves.

The current administration is implementing policies that appear aimed at reducing that inequality, while actually exacerbating the problem and hobbling America’s economic growth.

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  • lapazjim

    Well I agree that minimum wage should go up The big question is just how much to increase it?Exactly how much can the job market be pushed before it becomes that last straw on the camels back.The economy is in a fragile stage and may remain so for a long time to come.An increase in the minimum wage could destroy any recovery if it is too much and if it is to little the employees will complain.If minimum wage goes to the $10-$15 hr as some want then be warned that layoffs will follow due to employers need for profit.Many will be doing the work of 2 or 3 and paid at that minimum wage and many will be out of work.Sometimes its better to take the little before taking allot.
    Another factor I do not see mentioned is the increase in any and all aspects of life in the U.S..What of that burger that is now $3,it will most likely go to $6 or more due to the increase.What about food,gas and electricity,water and heating?These will all increase in every aspect of life in the U.S..Now lets look at at a major cost to many Americans–“RENT.” Oh yes fear not the greedy landlords will get on the bandwagon and increase their rents accordingly.One must make profit on others backs.What then of the people on fixed income such as people on Social Security,disability and what of the disabled veterans on fixed income?Will their pay be increased accordingly or do they sit back and watch the increase as their checks cover much less than ever.Then again who really cares of those people?They do!!
    Go ahead and raise minimum wage to that $10-$15 hr mark,but be prepared for the fallout that will come with it.Greed will follow even faster than the increase!!

  • interesting3243

    You have misconstrued the findings..but I think you are fully aware of that. Hopefully your readers have enough common sense to read the actual findings and other analysis. Your analysis is far too simplified and ignores numerous factors that do indeed impact our economy. As a fellow economist with 27 years of experience, I find this analysis weak and uninformed and even worse, very misleading.

    • Terry Ponick

      No, actually, you’re a partisan troll posing as an economist and poised to refute–without any facts–any argument that doesn’t agree with your party’s talking points. I figured our readers would want to know, since you’re not telling them.

  • Mark4083

    This is the dumbest thing I have ever heard. You’re telling me, Apple doesn’t have money to hire, Google doesn’t have money to hire, Boeing doesn’t have money to hire. That’s BS. Apple is not going to create jobs based on the raising and lowering of taxes. They are going to create jobs based on demand for their products. Our economy is a consumer driven economy, period. Right now the wealthy few control most of the income in this country yet most of the products sold in this country are for the middle majority. Who, oh by the way, can’t afford the products because their wages are so low. That’s what’s crippling this economy. Rich are holding into all the money, that money is not being put into the economy, it is idle. Doing nothing.

  • Wizz Key

    In 2012, the brain-dead apparatchiks of the Obama regime wasted $96,000 on iPads for kids. In kindergarten.