“We’ve Got to Do Something about Income Inequality”

 

This is what I hear over and over again from my liberal-minded friends.  Their solution is to raise taxes on the rich and give to the poor.  This might help a little but not nearly enough.
The best way to help middle- and lower-income people is to give them more opportunities for self-advancement by providing more upward mobility in society.  Right now the middle class is being “hollowed out” as shown in the chart just below.
CaptureThere are three major reasons for this:

  • Economic Globalization which provides low cost goods from around the world and thus puts pressure on low- and semi-skilled workers in the U.S.
  • Rapid technological advancement which puts a higher premium on educational attainment and advanced skill acquisition.
  • Slow economic growth averaging only 2.3% since the end of the Great Recession in June 2009.

Globalization and technological advancement are strong worldwide forces likely to continue indefinitely.  We will simply have to adapt to them with long term strategies such as improved educational outcomes at all levels (early childhood, K-12 and post-secondary).  But speeding up economic growth is under our direct control with tried and true methods which are not being fully utilized at the present time. Such as:

  • Tax Reform. We should lower tax rates for individuals across the board, paid for by shrinking deductions for the wealthy. This will give middle- and lower-income workers, as well as new entrepreneurs, more money to spend, thereby boosting both supply and demand in the economy.
  • Increasing the Earned Income Tax Credit paid for by using some of the increased revenues from shrinking deductions for the wealthy. This would encourage more people to take and hold onto entry level jobs, thus boosting the economy by increasing the size of the workforce.

In other words, much can be done to reduce income inequality.  Redistribution of tax revenue is fine as long as it is done in a way which increases economic growth, rather than just punishing the rich.

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