State of the U.S. Income Inequality Research Paper Example

Part I: Description of the State of the U.S. Income Inequality

The females-to-male earnings ratio increased by 1.1% from 0.796 in 2015 to 0.805 in 2016. Besides, the ratio of the median income of female householder with no husband present to the median income of male householder with no wife present increased from 0.6766 in 2015 to 0.7067 in 2016. The ratio of the median income of blacks to that of the white non-Hispanic increased by 3.4% from 0.587 in 2015 to 0.607 in 2016. The median income of Hispanics was 71.7% of that of the Whites in 2015. This percentage increased to 73.3% indicating a fall in the gap between the incomes of Hispanics and Whites. The median income of foreign-born citizens was 92.9% of the median income of natives, an increase from91% in 2015. The inequality among foreign-born employees also narrowed in 2016. The ratio of the median income of non-citizens to that of naturalized citizens rose by 3.3% from 0.728 in 2015 to 0.752 in 2016. The inequality of incomes between the Western and Southern regions also improved from 0.83 in 2015 to 0.84 in 2016. In addition, the ratio of Southern and Northeastern regions' median incomes also increased from 0.823 to 0.836. These variations show that the income inequality in the US dropped in 2016.

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Part II: Analysis of Economic Policies

Causes of Income Inequality

Income inequality has resulted from skilled-based technological changes. According to Bryan & Martinez (2008, p. 109), manufacturing and other technology-related jobs pay higher wages than others. When there are significant inequalities in real wages, the economy experiences growth in income inequality (Bryan & Martinez, 2008). Income inequality is also due to differences in education levels. Employees with higher levels of education earn more than those with low levels of education.

Political institutions have also played a role in promoting income inequality through anti-labor policies as well as tax policies that benefit the wealthy (Apel, 2015, p. 10). The Reagan administration in the 1980s and the Bush administration in the 2000s saw a decline in unionization (Apel, 2015, p. 10). The decline in union power led to the stagnation of real wages. Besides, tax cuts by several administrations benefited the wealthy. For instance, capital gains tax were reduced successively by different regimes from 49% in 1978 to 20% in 1997 (Apel, 2015). President Bush furthered lowered it to 15% implying that the top wealthiest Americans paid less taxes on capital gains than the 35% tax rate on ordinary income.

Globalization also contributed to increasing in income inequality in the US. As governments removed barriers to trade and capital flows, some corporations shifted production of labor-intensive products from the US to countries with low labor costs (Apel, 2015, p. 12). This has led to a reduction in manufacturing jobs in the US and downward pressure on real wages.

Policies Implemented by the Government to Reduce Income Inequality in the US and their effects

Redistribution Through Taxation and Welfare Programs

The government has implemented a progressive tax policy aimed at ensuring that higher income earners pay more taxes than lower income taxes. After the Second World War, the Congress passed the Sixteenth Amendment. The US tax code uses a graduated tax scale with tax rates ranging from 10% to 39.6% depending on the amount of income earned. Revenue collected through taxation is then redistributed to programs that benefit the low-income earners such as Medicaid, Medicare, unemployment benefits, among other programs. Between 1946 and 1970, robust sharing of economic gains reduced the income inequality as the incomes of the bottom 90% rose faster than those of the top 1% (Crocco, Marri & Wylie, 2011, p. 256). Redistribution of tax revenue through welfare programs is meant to improve the welfare of the low-income earners thereby reducing income inequality.

The actual effect of redistribution has not been impressive. According to Crocco, Marri & Wylie (2011, p.256), income inequality in the US has increased since 1976. Several tax cuts, especially capital gains, have limited the effectiveness of progressive taxation of incomes to reduce income inequality. As cited in Bryan & Martinez (2008, p. 102), there are no significant differences in pre-tax and after-tax income inequalities indicating that the progressive taxation has not been effective in reducing the inequalities. Besides, higher taxation, especially on the top 10% richest, reduce economic growth. According to Biswas, Chakraborty & Hai (2017), reducing the income gap between the median and high-income households through taxation lowers economic growth.

Minimum Wage Legislation

The minimum wage legislation is a policy aimed at reducing the income inequality to ensuring that workers earn a living wage. The federal minimum wage was at $7.25 per hour in 2009. States have also enacted minimum wage legislation with some such as Colorado, having a minimum wage higher than the federal level. Increasing the minimum wage can reduce income inequality. However, the last time the federal minimum wage was adjusted is 2009 implying that it has lost close to 10% of the purchasing power due to inflation.

This policy has not been so effective since it is not possible to regularly raise the minimum wage. Besides, raising the minimum wage adversely affect economic growth through job losses and shift of production activities to countries with favorable labor costs. Studies have shown that states that have higher minimum wage rates have experienced significant job losses thereby worsening the income inequality.

Investment in Education

The government has increased allocation to education. Education is now one the largest budget items. Education programs supported by the government include student loans and grants, among other initiatives. This helps students from poor families who cannot afford college or university education. Lowering the inequality in education levels narrows the gap between the rich and the poor since highly educated employees earn higher salaries than those without a college education. The number of graduates benefiting from these programs has increased over the last decades. However, increased spending on education and other welfare programs have increased the budget deficit leading to higher taxation and increased borrowing.

The effectiveness of these Government Policies

The above policies have not had a significant impact on income inequality in the last few decades. Progressive taxation and redistribution are effective in reducing the earnings gap for ordinary incomes. However, the top 10% richest earn most of their incomes through capital gains which are taxed at lower rates. Studies have indicated that there is no much difference between pre-tax income inequality and after-tax income inequality. The minimum wage legislation reduces income inequality to the extent to which it provides a living wage. Its impact is not significant since only 2 million are minimum-wage workers.

References

Apel, H. (2015). Income inequality in the U.S. from 1950 to 2010 - the neglect of the political. Real-World Economics Review, (72), 1-12.

Biswas, S., Chakraborty, I., & Hai, R. (2017). Income Inequality, Tax Policy, and Economic Growth. The Economic Journal, 127(601), 688-727. http://dx.doi.org/10.1111/ecoj.12485

Bryan, K., & Martinez, L. (2008). On the Evolution of Income Inequality in the United States. Economic Quarterly, 94(2), 97-120.

Crocco, M., Marri, A., & Wylie, S. (2011). Income Inequality and U.S. Tax Policy. Social Education, 75(5), 256-262.