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Taxes, Technology, and Economic Inequality

Justin Duffy
Mounds View High School
Arden Hills, Minn.

Looks can be deceiving. Recent economic news indicates that the U.S. has recovered from the recession of2008. The gross domestic product has seen steady gains for many consecutive quarters, private-sector jobs have been added to the economy for years, and the housing market continues to get stronger (Klobuchar). Despite these positive economic indicators, income inequality is at a historically high level. U.S. tax policies that benefit the wealthy and technological advances that have outpaced the capabilities of low-skilled workers are reasons why economic inequality has increased while the economy as a whole has prospered; tax reforms could be used to halt the inequality.

Many traditional causes of economic inequality are not as influential as they once were. Some of the traditional causes are "high land concentration, unequal access to education, and other public services, selective access to credit, the dominance of the mining or plantation sector, and the urban bias of public policy, which allowed city-based elites to capture a disproportionate share of economic opportunities" (Ocampo). While these causes may always have some effect on economic inequality, as traditional causes, many of them have less impact in the U.S. today. For example, land concentration problems usually cause income inequality in agriculture dominated countries ("Income Inequality"). As a major provider of manufactured goods and services, the current U.S. economy is less influenced by the agriculture industry; only 2% of the population works in agriculture today (Social). With respect to credit access, many experts contend that it was the easy access to credit, not the lack thereof, which contributed to the 2008 recession (Guina). Of the traditional causes, the effect of public policy bias and the lack of access to education still have a major impact on economic inequality. Recent analysis of the economy indicates that the federal government's tax policy might be the most significant traditional cause of both pre-tax and after-tax economic inequality in the U.S. The disparity in economic growth is due in large part to the rise of capital income (income originating from wealth) as a share of total income in the top 1% of households. Preferential tax rates on capital gains and dividends contribute greatly to this disparity. Because a progressive income tax can help reduce income inequality, the more regressive nature of the tax code, with preferences for capital income, has contributed to after-tax income inequality in favor of those at the top of the income ladder (Fieldhouse). Tax policies that favor capital income create more separation between the wealthy and the poor.

The favorable treatment of capital gains in the current tax code is not the only factor that contributes to income, and ultimately economic, inequality; low interest rates have arguably led to more capital gains for the wealthy. The Federal Reserve's policy of setting low Treasury rates has caused investors to avoid bond investments (with low returns) and seek other investments in stocks or commodities. A vibrant stock market is most beneficial to the wealthiest investors, who own 91 % of stocks and bond wealth (Schiff). Low interest rates have also pushed investors to commodities trading, causing food prices to rise. Higher food prices subsequently contribute to more income inequality because those on the lower end of the income scale must spend a greater percentage of their income on food (Amadeo). Government policy, intentionally or not, is allowing wealthy people to get wealthier while making poor people get poorer.

Technological progress also profoundly impacts income inequality (Izzo). Those who are not able to gain the skills to keep up with technology (the under-educated) are replaced by machines or skilled workers (Acemoglu). The impact of technology on income inequality is extensive because technology both negatively affects those on the lower end of the income spectrum and positively affects those on the higher end of the income spectrum. Advances in technology have created a situation where machines are able to replace many lower-skilled jobs. For example, over the last three decades, over five million manufacturing jobs have been lost to machines (Dietz and Orr). At the same time, those same advances result in higher salaries for those who are most able to productively harness technological advances (Keane). In sum, when the demand for technical skills is greater than the supply, there is an escalation in economic inequality (Rotman).

Changes in government policies, including tax reform, could close the widening trends in income inequality. Adding tax brackets at higher taxable income levels or reducing tax preferences for investment income are a few ways to reduce income inequality (Fieldhouse). With respect to technology's effect on economic inequality, improving access to better learning opportunities for low-income people can close discrepancies in education and skills (Rotman). Experts believe that there are enough high-skilled jobs available for those who want to improve their education and skills (Skilled Trades). When low-skilled workers obtain education and can take on high-skilled jobs with higher wages, economic productivity increases and economic inequality lessens.

Some sort of economic inequality has existed as long as there have been economies.

Many factors contribute to economic inequality, but two factors, tax policies that favor capital gains and lack of access to educational opportunities to train unskilled workers to keep up with technological advances, have caused income inequality, and ultimately economic inequality, to reach historical highs. Tax and education reforms should be implemented to reduce economic inequality in society.

Works Cited

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Amadeo, Kimberly. "Reasons for U.S. Income Inequality." Aboutnews. Web. 26 Feb. 2015.

Cornia, Giovanni A. "Household Debt and Income Distribution." Journal of Economic Issues 47.2 (2013): 323-31. Web. 26 Feb. 2015.

Dietz, Richard, and James Orr. A Leaner, More Skilled U.S. Manufacturing Workforce. Intelligent Community. 2006. Web. 23 Mar. 2015.

Fieldhouse, Andrew. "Rising Income Inequality and the Role of Shifting Market-Income Distribution, Tax Burdens, and Tax Rates." Economic Policy Institute. 2015. Web. 26 Feb. 2015.

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Income Inequality and the Condition of Chronic Poverty Although the Adverse Effects of Financial Crises. Web.

Izzo, Phil. "Technology, Not Globalization, Feeds Income Inequality." Real Time Economics RSS. 24 July 2008. Web. 26 Feb. 2015.

Keane, Tom. "The Real Reason for Income Inequality- The Boston Globe." Boston Globe, 22 July 2014. Web. 27 Feb. 2015.

Klobuchar, Amy. "Income Inequality in the United States." Joint Economic Committee. Web. 26 Feb. 2015.

"Peter Schiff: The Fantasy of a 91 % Top Income Tax Rate." WSJ. 6 Dec. 2012. Web. 17 Mar. 2015.

Ocampo, Jose Antonio., Jomo K. S., and Sarbuland Khan. Policy Matters: Economic and Social Policies to Sustain Equitable Development. Hyderabad, India: Orient Longman, 2007. Print.

Rotman, David. "Technology and Inequality." MIT Technology Review. 21 Oct. 2014. Web. 26 Feb. 2015.

"Skilled Trades Are in High Demand." Skilled Trades Are in High Demand. Michigan Trade School, 2012. Web. 23 Mar. 2015

"Social." Fast Facts About Agriculture. American Farm Bureau Federation, 2015. Web. 24 Feb. 2015.