In recent years, increasing inequality in the distribution of income has been a subject of considerable public concern, political attention, and academic research. Income inequality is a measure of how equally the income pie is divided among all members of society. The relative income, or gauge, can be defined how well the poor are doing economically compared to the rich. In other words inequality is a measure of how equally the income pie is divided among all members of society. According to Paul Ryscavage in Income Inequality in America, income is influenced by several social, economic, and demographic factors. Occupation, industry of employment and source of income represent the economic factors. The main social factors are household composition, education level, and education quality. Finally, age, sex, and race compose the demographic factors (15). Socio-economic diversity can be a clean representation of how well income is distributed among social groups.
In an ideal society the majority of households should have incomes above the cost of basic needs to create a well-balanced economy. Therefore, the foundation of economic success is based largely on this distribution providing a strong middle class that can support the economy and no extreme income gap between rich and poor guarantees economic stability. On the other hand inequitable income distribution may not only lead to economic problems, but also social problems. In Created Unequal, Peter Galbraith believes that income distribution analysis shows that the gap widens more and more between social groups and creates problems (3). These problems can damage the developing process of a society, thus finding solutions to create a well-balanced income distribution is essential for present governments.
Through the historical review of the background of the issue of income distribution one can present possible solutions to help maintain good economic development and stable society. The solutions presented are the reform of welfare system, progressive taxation and an increase in minimal wages.
John Borland points out in ?Fear of Falling? that the income gap has been steadily increasing since the postwar era. Currently the income inequality is at its highest level ever (1). US Bureau of Census indicates that an increase of 4.7 % of the total income allocated at the top 5 %, while the lowest quintile had a decrease of 1.2% of the total income held between 1970 and 1996 (473).
Fig 1. U.S. Distribution of Income in 1997; rpt. in Rector and Hederman (2).
It is evident from the above graph that the most current data shows that top quintile holds 49.4% of the total income in the U.S.A. while the bottom quintile holds only 3.6%. The graph is somewhat misleading because the bottom and the top quintiles do not really represent the 20% of the population. Through research Rector and Hederman in ?Income Inequality: How Census Data Misrepresent income distribution? state that ?Indeed, in reality the top Census ?quintile? contains not 20 percent of the population but 24.3 percent, while the bottom quintile contains only 14.8 percent of the population? (4-5).
The historical overview of income distribution from 1945 until today could be divided into three distinct periods: 1945-73, 1973-81, and 1981-89. The first period represents what is called the ?good years?, the great postwar boom generations. This period, from 1945-73 shows what real, broad-based prosperity looks like. One of the main reasons why income distribution decently increased for middle class during this period was the reconstruction of US after WW II, and rapid and constant economical growth. The employment rate reached peak during this period, where well educated people, high school and up, were earning very good wages. The government was keeping interest rates very low, and that encouraged many corporations and private businesses to invest money and strengthen the economy that way (Galbraith 10).
William Niskaken indicates in Reaganomics: An Insider?s Account of the Policies and the People that the second period, between 1973-79, showed a major slow down in income growth as the economy was battered by slow productivity growth and oil shocks (7). Basically the 1973 oil shock was the confluence of independent political and economic factors. Finally, a new pattern emerged after 1981: generally slower income growth, but in particular, a strong tilt in the growth pattern, with incomes rising much faster at the top end of the distribution than in the middle, and actually declining at the bottom. All these changes in economy did not happen by accident. As we know, this period is symbolized by Reagan?s presidency, so it?s called Reaganomics. Reagan proposed a recovery plan including budget reform plan, tax cuts, regulatory relief and currency stabilization program (Niskaken 4). Beside the fact that Reagan?s economical policy had significant influence on inflation, economical growth and defense development, lower classes were the ones that paid the cost. The upper class benefited the most from the political tools used by Reagan, separating itself even more from the neglected lower class (Niskanen 265).
There are many possible solutions for the income distribution problem that would change current situation and hopefully improve living standards of lower class. Currently, income distribution in the United States is really unequal, and what government is doing is not enough to make descent changes that would improve standard of living of the lower classes. Three main solutions that are proposed nowadays are reformation of welfare programs, progressive taxation, and increase of minimum wages.
Welfare is one of the tools used to help out the lower class. Bill Clinton, during his presidency made descent increases for this fund, but that does not seem to help at all. In Money: Who Has How Much And Why, Andrew Hacker reports that poor, which are receivers of welfare, are mainly families with single mothers, single women and city dwellers (62). Therefore, welfare should be targeted toward those three groups.
Some people might argue that the recipients of welfare are never going to make any progress in society. Ryscavage believes that providing welfare to the poor creates a vicious cycle where recipients become so dependant of welfare they are never going to make it on their own (109). Welfare provides help for the poor to survive but not to bring them out from poverty. In order to achieve that welfare needs to be restructured.
The main plan for welfare reconstruction comes from the proposal of welfare privatization. Joel Nelson illustrates in Post-Industrial Capitalism that privatization of welfare would cut the cost of welfare allowing the business to grow more easily (138). Privatization of welfare would increase the efficiency of welfare because of rules of free market. The two main forces of free market, competition and bidding, serve to reduce cost and to increase flexibility, at least in comparison with somewhat lengthy bureaucratic processes common to governmental institutions. Ryscavage shows that increased spending on the welfare has a direct effect of on income distribution (176-177). Privatization is seen as an efficient response to the problems of supplying welfare services at a cost consistent with consumer demand solving the fiscal difficulties of the welfare state. The issue that arises with privatization of welfare is giving control to profit-driven market. The government is not going to allow that in near future so the problem of unequal income distribution calls for solution that can be used immediately.
In order to deal with income inequality government has been using progressive taxation and targeted tax cuts. Progressive taxation is way of taxing people depending on their income level, where increase in tax percentage withdrawn from their incomes? is made according to the amount of their wages and salaries. The goal of progressive taxation is to reduce the income gap between rich and poor by reducing taxes for the lower class. Borland explains that boundaries of social classes are really hard to define (2). Therefore progressive taxation may not fulfill the needs of some families/individuals on the boundary of low and middle class.
Several steps may be undertaken by the government to make progressive taxation more efficient. Through various examples Hacker shows that putting a ceiling on the income can balance the income distribution very effectively. Putting a ceiling means limiting the maximum income of a family/individual and distributing the excess amount earned over the programs and services used to help the lower class (55-56). This method of progressive taxation is very effective but it would create turmoil in the upper class.
Another way of affecting the income distribution is through tax cuts for businesses. By reducing the amount of money taken for taxes, businesses have more capital left over for future investment. According to Niskaken more capital would result in growth of the business, generating more jobs. Therefore, more people would be able to generate income (54).
Minimum wages reflect the income level of the lower class. Galbraith claims the increase in the minimum wages would reduce the income gap between rich and poor (145). Solution of increase of wages for working class could be understood as a chain reaction, where one step would pull another. First step would be to increase wages for lower working class. This approach would cause direct increase in the purchasing power of this class. The purchasing power would allow the lower working class buying more goods and services, which would directly increase the economic growth.
Government has already taken steps in increasing the minimum wages but Hacker and Ferguson agree that minimum wage is still too low to generate income above the poverty line (230; 5). Wages have a major impact on income distribution. Economists and politicians acknowledge the fact that low wages increase the poverty. Ryscavage explains that in order to defeat the poverty, government has to increase the minimum wage (88). The involvement of government is essential because of the competitive market. Corporations have to cut down in production costs and usually pay the minimum for labor and never take the initiative to increase the wages on their own.
Unequal income distribution has been present in the American society for a long time creating social and economic problems. In order to reduce the gap between the rich and the poor in the U.S.A., some radical changes have to be done with minimum wages, taxation methods and welfare programs. First of all, it is very important to increase salaries for lower class workers. Second thing would be to make changes in progressive taxation, where richer people would pay more taxes, and lower classes would have descent decrease in amount that they are supposed to pay. Third solution is increase in welfare funds, where government would make lives of lower class people much easier. As I can conclude, there is no one solution that would work the best. In order to make income distribution shift, the best thing to do is to integrate these three methods together and come out with perfect solution for this problem.
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