How Bad Is Income Inequality and How Do We Fix It?

 

The latest news on the American economy is mixed. The unemployment rate fell to 5.9% in September but the labor force also fell by 97,000 last month.  The labor participation is now down to 62.7%, a level last seen in 1978.  On the plus side 248,000 new jobs were created but the share of the population employed stayed at 59%, less than its 59.4% level at the end of the recession in June 2009.  In other words, job growth is definitely picking up but not fast enough.
CaptureHow about income inequality?  One simple way of describing and understanding the degree of income inequality in the U.S. is to look at median household income and how it changes over time.  The above chart from the WSJ shows how the median U.S. household income fell from an all-time high of $56,895 in 1999 to $51,939 in 2013.  However it also climbed back up to $56,436 in 2007 before dropping precipitously until 2012.
Capture1The Global Strategy Group discovered in a recent survey that registered voters overwhelmingly rate economic growth as a higher priority than economic fairness.  This means that any policy designed to speed up economic growth is likely to receive favorable support by the electorate.
In a recent post I describe a plan for broad-based tax reform specifically designed to speed up economic growth.  It would involve an across-the-board cut in tax rates totaling about $500 billion per year, but completely paid for by closing loopholes and deductions which primarily benefit the wealthy.  The 64% of taxpayers who do not itemize deductions would receive a tax cut.  And they would likely spend this extra money in their pockets because they are precisely the middle- and lower-income wage earners with falling incomes.
An income tax redistribution like this would greatly reduce inequality but in a way which is designed to give the economy a big boost!

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