Tuesday, January 8, 2013

Tax Increases and Inequality

According to sources close to the recent tax negotiations, Obama's primary goal is to permanently decrease inequality in the US. He intended to do that by allowing the Bush tax cuts to expire to the bottom 98 percent., while letting them increase for the top 2 percent (those who earn $250,000 or more per year). 

Over recent decades, inequality has grown throughout the world with the US and Canada being no exception. The cause of this ever-increasing inequality can explained in a single question: Who harvests the benefits of productivity improvements caused by technology?

No and Low skill workers do not capture their own productivity improvements as they are completely interchangeable  When wages for no skill workers in America became too high and the cost of moving became so low, then manufacturing jobs went to China. If wages in China get too high, then factories will move to Bangladesh. So on and so on. The owners of the factories and the upper management who run them are able to harvest the productivity improvements.

For high skill workers, they are able to capture more of their own productivity increases as they can more easily harness technological improvements for their own benefit. In general (with plenty of exceptions), higher amounts of education that you receive then more specialized, less interchangeable you are. In effect, greater your paycheck will be. The entire middle class is based off of the foundation of education. Even up to the top 1 percent of wage earners is composed mostly of doctors, lawyers, financiers, and accountants. People who pursued advanced degrees. 

The exception to this rule of education is those who are writing, rather than receiving, the paychecks on a grand scale (big business, but some "small" ones as well).  Globalization has meant less expensive inputs (materials, equipment, and human resources), therefore greater profits for those who own and manage them.  That is why the 0.1 percent of wage earners are mostly composed of a completely different occupation - business owners and upper management employees. 

That is how you end up with a chart like the one at the top of the page. 

Back to the tax negotiations - the resulting deal ended up raising tax rates on the top 0.7 percent of income earners (Greater than $400,000 a year) while holding them down for the other 99.3 percent. The total cost of the package was about $3.2 trillion dollars compared to letting the Bush tax cuts expire completely or 82% of extending them wholesale. 

New Effective Tax Rates provided by the Tax Policy Center:

Bottom fifth: 1.9 percent
Second fifth: 9.5 percent
Middle fifth: 15.6 percent
Fourth fifth: 19.0 percent
80-90 percentile: 21.5 percent
90-95 percentile: 23.4 percent
95-99 percentile: 26.3 percent
Top 1 percent: 36.9 percent
Top 0.1 percent: 39.6 percent

Obama was able to accomplish his goal of lessening inequality by creating a more progressive tax system in this round. The president plans on asking for even more in taxes from the top 2 percent of income earners in the next round of negotiations.

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