A recent Brookings Institution study reveals that the disparity between rich and poor is larger than ever, and is only expected to grow unless proper reforms are made. The paper, titled “Rising Inequality: Transitory or Permanent? New Evidence from a Panel of U.S. Tax Returns,” analyzes the growing and permanent inequality between rich and poor in the United States by looking at thousands of confidential tax returns to examine the progression of household income over the course of 23 years.
Brookings Papers on Economic Activity co-editor Justin Wolfers said of the findings, “It’s actually the rich are getting richer and staying richer. The poor, poorer and staying poorer. Now the tax system is somewhat helpful here. Yes, we have progressive taxes in the United States, and were it not for that, the authors show us, income inequality would have grown by more.”
The phrase “the rich are getting richer and the poor are getting poorer” has never been more true, and stating that the middle class is shrinking is not just political rhetoric but a matter of fact that can have serious consequences on the economy. This isn’t the first study to confirm the growing gap in inequality, but what makes this Brookings study so compelling is its rare method — it is not a survey, but instead an analysis based on over two decades’ worth of actual tax data.
During the 2012 presidential election, Mitt Romney called the debate on income disparity a “bitter politics of envy,” adding, “I think it’s about class warfare.” What Romney failed to see were the serious implications that growing income inequality can have on the economy and society. When individuals and households can’t afford to purchase commodities, it affects businesses and stunts economic growth. The data presented in this study show that the attempt to close the inequality income gap is not an attack on the wealthy, but instead entirely necessary and in the best interest of society as a whole.
According to the Brookings study, “for men’s labor earnings, the increase in inequality was entirely permanent (100 percent), while for total household income, roughly three-quarters of the increase in inequality was permanent. [The authors] estimate that the permanent variance for men’s earnings roughly doubled in the 20 years between 1987 and 2009, while the permanent variance of total household income increased by about 50 percent over the same period.” Currently, the opportunity for households to work their way to a higher income bracket is more remote than ever.
The authors cited tax policy as a main contributor to this inequality. Despite a progressive tax code, Wolfers says, “the tax system is not enough to overcome the overwhelming economic force through this period, which is for income inequality to have risen, and so it’s still risen substantially even on an after-tax basis.” The tax code alone won’t stop the expanding income gap, but can most certainly slow the quickly expanding inequality.
The authors conclude the survey by stating, “Our findings, along with economic theory, suggest that the increase in income inequality observed in roughly the last two decades should translate into increases in consumption inequality, and is therefore likely to be welfare-reducing, at least according to most social welfare functions.” The consequences of this growing disparity will have a negative impact on the overall well-being of Americans.
It is more challenging than ever for low-income individuals or households to come out of poverty, which is why Congress and the White House must now implement a tax code that can more effectively slow down the shrinking of the middle class. This study proves that it is poorer Americans who need assistance through tax breaks, a raising of the minimum wage to meet the cost of living, and to be provided with the education and resources to break into new industries. Providing these incentives for American workers can help fix the economy from the bottom up, and re-strengthen the diminishing middle class.
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