Oakton High School
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How to Tackle the Growing Income Disparity
The growing income disparity in the United States is jeopardizing the future of America’s middle class and low-income families. While most people today agree that income disparity is a problem, there is no consensus as to how it should be addressed. Despite the divergence of views on plausible solutions, one thing is certain – if the country wants to realistically and readily tackle the growing income disparity, there needs to be tax code reform that allows for greater cooperation and concession between corporations and the Federal Government.
Oddly enough, the best immediate solution to this complex issue is probably the most instinctive one: increase the disposable income of hourly-rate and salaried employees. As a direct outcome of increased income for these workers, the middle class will grow and strengthen, thus shrinking the income gap.
The reality is, however, that the average American is simply not receiving the fair, sustainable salary that they deserve. In an October PBS NewsHour interview, Pulitzer-prize winning journalist Hedrick Smith, author of the book Who Stole the American Dream?, argued that today’s weak economy is a consequence of a stagnated middle class that has not seen a significant increase in salary over the last few decades to account for inflation and the cost of increased living expenses. According to Smith, America’s middle class has been split “off from the gains of the national economy;” a predicament he labels “wedge economics.” Smith calls the era between the 1940’s through the mid 1970’s “the period of greatest economic growth” because economic prosperity was shared in the form of higher wages for the average American. This fundamental principle is crucial in finding solutions to income disparity.
The full gamut of the political spectrum agrees that corporations and the CEOs that make up the top 1% of wealthiest Americans, as President Obama puts it, “are doing fine in today’s economy.” According to a CNN Money report, the corporations that make up the Fortune 500 generated a combined $824.5 billion in earnings in 2011; this is an increase of 16.4% from 2010 and beats the previous record of 2006 by almost $40 billion dollars. Yet, at the same time, America’s middle class is facing crippling circumstances.
The average American employee is experiencing an unprecedented disparity between their productivity in the work place and the hourly compensation for their work. Lawrence Mishel, of the Economic Policy Institute (a non-partisan economic think-tank in Washington, D.C.), reports on this subject using economic data from the Bureau of Labor Statistics. His analysis shows that from 1975 to 2011, there has been an 80.4% growth of hourly productivity for the American workforce, while there has only been a 39.2% increase in average hourly compensation and only a 10.7% increase in median hourly compensation (Mishel). This means that the middle class worker that is making the median wage has not seen nearly the same hourly compensation increase as the high-wage worker. In order to tackle income inequality, the disparity between worker productivity and hourly compensation must be reduced as well as the disparity between hourly compensation of high-wage and median wage workers.
The obstacle to achieving this objective is that the parties required to address these disparities, namely American companies, are making record profits and sitting on billions of dollars of revenue. Therefore, they see no incentive to pay their employees higher wages because in the American economic system they are not incentivized to promote a greater distribution of wealth. The nature of America’s capitalistic system has altered in the recent decades and the result is that it is failing the middle class and low-income workers. In order to push the United States’ economic system back into the right direction for the majority of Americans, there is a need for government involvement. The nation needs the Federal government to provide motivation for companies to raise employee wages.
Given the contrasting views held by the two major political parties regarding the Federal Government’s role in the economy, bipartisan solutions must be sought to realistically solve economic woes. Despite being in the midst of a presidential election campaign where such opposing views are expressed, President Obama and Governor Romney find common ground on the issue of the corporate tax rate. Since both parties generally agree that the corporate tax rate at 35% is too high, the country must capitalize on this agreement and work with the corporate tax rate in order to readily tackle income disparity.
American businesses want a lower corporate tax rate. At the same time, American businesses need greater incentives to pay their employees more. Therefore, if the Federal Government wants to play a substantial role in reducing this income disparity, corporate tax code reform must be made. However, a reduction of corporate tax by itself, despite what “trickle-down theory” economists may argue, will prove to be counterproductive. This is because it will not force corporations to invest back into the economy by paying their employees more; instead it will only exacerbate the situation by allowing corporations and their shareholders to sit on larger profits than ever before. Thus, in order to reduce income inequality, corporate tax reform should be conditional. Tax incentives should only be provided for businesses that raise their employees’ wages, especially those workers earning wages less than the average hourly compensation. Not only will this reduce the productivity/compensation disparity for American laborers, it will also reduce compensation disparity between the high-wage and low-wage earners.
Corporate tax code reform can also be made to reduce unemployment in America which will in turn allow for a better wealth distribution. Loopholes and deductions in the corporate tax rate that provide companies incentive to invest in overseas production and manufacturing jobs need to be eliminated. This is a leading cause of unemployment in the United States because companies that move their jobs to new locations get deductibles in their tax rates. Also, companies often make and keep profits in foreign countries because the corporate tax rate in those countries are usually significantly less than the United States’ 35% corporate tax rate. For this reason, the corporate tax rate should only be lowered if these loopholes are eliminated first. This condition will make investing in American jobs more attractive and will prevent rich corporations from yielding even greater profits at the expense of the employee. New jobs would allow for a greater distribution of wealth as more people would be able to climb out of poverty and make their way into a growing middle class.
The reason that these corporate tax code reforms have not yet occurred and will probably face some opposition in legislative bodies is because of differing partisan viewpoints and agendas. Fiscal conservatives might be reluctant to concede to the conditions for corporate tax incentives because of the implications it holds regarding government’s role in free-enterprise economy. On the other hand, liberals might contend that these pre-conditions might not necessarily do enough to ensure that corporations make impactful investments in American jobs and significantly increase the salaries of their employees. Nevertheless, these are the concessions and cooperative actions that government and businesses need to make to provide the best solutions for tackling income disparity.
Still, these policies by themselves do not necessarily result in completely rectifying income disparity; these policies mainly focus on building a stronger and larger middle class that gains a greater share of the nation’s wealth. Corporate tax reform needs to be coupled with reform in income tax rates to provide greater parity between capital income and salary income. The individuals that are gaining most from corporations’ record profits are those shareholders that made the investments in those companies and pay a capital tax rate. As of now, these individuals, who usually make up America’s richest 1% by making millions of dollars on these lucrative investments, have to pay a lower tax rate than the middle class laborers who pay an earned salary tax. Although this tax rate reform would probably receive much opposition in congress because of the heavy influence of corporate lobbyists, the inequality between capital tax and earned salary tax must be reduced if income disparity is to be seriously addressed.
The growing income disparity in this country really puts the priority of the countries’ values and principles in question; right now, we are compromising our ubiquitous cultural value of homogenous socio-economic opportunity for the continuation of our steadfast faith in laissez faire policies. There is no easy or straightforward measure that can be taken to absolutely solve the problem of the growing income disparity. Regardless, the reality is that this country can only tackle income disparity by addressing the issues that allow such disproportionate distributions of wealth to occur. This means that the Federal government needs greater involvement in corporate practices by adjusting tax rates so that the government and private businesses each willingly make concessions and collaborations for the benefit of the entire nation’s population.
Mishel, Lawrence. “The Wedges Between Productivity and Median Compensation Growth.” Editorial. Economic Policy Institute. Economic Policy Institute, 26 Apr. 2012. Web. 24 Oct. 2012. <http://www.epi.org>.
Smith, Hedrick. Interview by Ray Suarez. PBS.org. MacNeil/Lehrer Productions, 3 Oct. 2012. Web. 23 Oct. 2012. <http://www.pbs.org>.
Tully, Shawn. “The 2011 Fortune 500: The Big Boys Rack Up Record Setting Profits.” Editorial. CNNMoney. AOL inc., 7 May 2012. Web. 22 Oct. 2012. <http://www.dailyfinance.com>.