Assignment 4: Persuasive Paper Part 2: Solution and Advantages

Assignment 2:  Persuasive Paper Part 1: A Problem Exists 

Gregory Best

Dr. Roger Fontana

ENG 215

8/5/17

Should taxes on people making over $250,000 a year be changed?: Problem Identification and Proposed Solution

Income and wage inequalities are significantly higher in the United States than in other developed economies such as European nations Australia. The existence of this inequality gap has further broadened in the first periods as the country witnessed a sharp increase in wage inequality, while European nations have only seen modest changes (Guvenen, Kuruscu & Ozkan, 2013). Taxation policies have a major role to play in exploring and understanding these realities. Moreover, fiscal policies in the country have been less efficacious in reducing income inequality. For instance, the tax and transfer mechanisms reduced the average Gini (the dissimilarity between the Ginis for market and disposable incomes). The ineffectiveness of tax and fiscal policies in minimizing income inequality is representative of both low tax and spending levels and progressive tax and spending mix. Increasing taxes for those who earn $250,000 and beyond can be an effective way to reduce income inequality in the United States.

Problem that Needs to be Addressed

Even during periods of economic prosperity, the United States still has a significant population of poor people. In such an affluent economy like the United States, poverty is still a permanent fixture. In order to understand the persistence of poverty, it is important to examine the present imbalances in income and wealth distribution, the structural and dominant cultural beliefs, and policies that are helpful in encouraging it (Coady & Gupta, 2012). One of the possible reasons why poverty is so persistent in the country is the ways in which income and wealth are distributed. The existence of a wide income gap between the richest and poorest segments of the populace has been significantly growing over the last ten years, though the recent recession might have reduced this pattern by a mere bite out of the sources of income that are present among the very wealthy, such as stock dividends and real estate.

One of the causes of income inequality is poor tax policies. For instance, those who earn more than $250000 pay proportionately less taxes than those who earn less than $250000. In addition, the average American company head earns more than ten million dollars annually, while some of the lowest paid individuals in an organization may go home with only $5000 a year. While policymakers may believe that personal efforts and hard work primarily determine the success of an individual, it is hard to believe that a company executive works over two hundred times harder than a casual or junior employee who assembles products and deals with consumers.

Tax legislations and policies also operate in a manner than benefits those at the top income ladder. In as much as it cannot be disputed that rich individuals pay a lot of taxes as a total percentage of all taxes garnered, they do not pay a lot of taxes as a percentage of what they earn and are able to afford. For instance, in early 1940s, the tax rates for the richest tax groups were approximately 90 percent. Presently, it is only 35 percent. Surprisingly, the threshold for this top bracket is just $357000. This implies that any income that falls above this is taxed at the same rates (Newman, 2013). For instance, an individual who earns $40 million annually pays the same tax percentage as his or her counterpart who earns $250000. Though most Americans paid more taxes as a percentage of income during the last 1990s and early 2000s than in the last decades, most of the richest citizens in the country paid fewer taxes. Families that earned more than a million annually have witnessed their federal tax rates decline more significantly than any other group within the country. For instance, in 2008, the federal government introduced tax cuts that did no virtually affect the low-income families. Nevertheless, families that belong to the top one percent of income earners witnessed tax reductions of more than $50000. This suggests that the United States has one of the greatest income inequalities between the rich and the poor. The richest fifth of the American families earns almost nine times more than the poorest fifth.

Proposed Solutions

In order to address the above problems, there is need to introduce a taxation policy that encourages equitable growth in order to reduce inequality. This is because taxes not only affect the distribution of income, but they also affect the GDP per capita by influencing labor use and productivity. There is also need to introduce tax reforms that improve growth prospect while reducing the distribution of income (OECD, 2010). In addition, there is need to increase total tax revenues. This is because the effects of taxes on income distribution rely on the degree of taxation, the tax mix, and the use of tax revenues. However, if tax systems are progressive in nature, equality is increased. Taxes often dampen the incentives to work, save, and invest. These effects can be detrimental to growth. However, some taxes have minimal negative impacts than others.

Another strategy is to change the tax mix while maintaining the total tax revenues constant. This can be achieved by moving the personal income tax to consumption taxes. Another way to realize this objective is to move from labor income to property and capital taxes. Personal income tax tends to be progressive while consumption tax is regressive (OECD, 2010). Furthermore, personal income tax minimizes work and saving incentives. Therefore, a significant shift from direct to indirect taxes can increase the GDP per capita. The distributive effects depend on the relative progressivity of income versus wealth and inheritance taxes.

References

Coady, D., & Gupta, M. S. (2012). Income inequality and fiscal policy. New York: International

Monetary Fund.

Guvenen, F., Kuruscu, B., & Ozkan, S. (2013). Taxation of human capital and wage inequality:

A cross-country analysis. Review of Economic Studies, 81(2), 818-850.

Newman, D. M. (2013). Sociology: exploring the architecture of everyday life: exploring the

architecture of everyday Life. Boston: Sage Publications.

OECD. (2012). Economic policy reforms: going for growth. New York: OECD Publishing.