Inequality can be seen in various different contexts. Within the last years, public increased caring about gender inequality through rising feminism, as well as there have always been conflicts over racial inequality and the different treatment of people because of their skin colour or origin. At the same time, huge disparities can be recognized when looking at the distribution of wealth in a country: economic inequality has been rising in nearly all regions in the world over the last decades.
But how sharply inequality rises does not necessarily depend on a nations stage of development: Although the USA belong to the developed countries in the world, they appear to show a comparatively unequal income distribution. Whilst 37% of the national income was earned by the top 10% of the population in Western Europe between 2012 and 2016, the top have an the top 10% in the USA earn nearly half of the national income with a share of 47% (Alvaredo, Chancel, Piketty, Saez & Zucman, 2017, p. 76).
This essay has the purpose to evaluate the degree of inequality in the United States to be beneficial or rather of a disadvantage, as well as it aims to find reasons why the USA show comparatively higher inequality than more equitable societies.
In the following, I am first going to elaborate on further evidence on rising inequality in the USA before the advantages and the disadvantages of having a certain degree of economic disparity in a country are going to be discussed, as well as they will be applied to and weighted for the given case study of the USA. Furthermore, I am going to elaborate on government intervention and the competing aims of enhancing efficiency and equity before taking a closer look at the particular intervention through taxation as a mean of regulating income inequality.
Evidence for Economic Inequality in the USA
The disparities between the wealthiest part of the US American population and the rest has been continually increasing within the last twenty-five years (Ornstein, 2007). This development is reflected in Figure 1 displaying the contrasting developments in share of national income in percent for the bottom 50 and the top 1% income group. The incomes of the top 1% collectively rose from 11% of national income in 1980 to more than 20% of national income, whereas the income of the bottom 50% declined from 20% to 12% in the mentioned time span. This reflects that 8% of the national income have been moved from the latter to the former while the top 1% rose even more than that, although the group of people making up the bottom 50% makes up a part of the population which is more than fifty times larger than the group forming the top 1%.
In 2014, the bottom 50% which make up approximately 117 million people, earned on average only $16 600 which is only one-fourth of the average income of $66 100 before taxes. This number relatively stagnated since 1980, whereas the top 1% average pre-tax income rose from $439 000 in 1980 to $1 337 000 in 2014 which equals more than 20 times the national average income. So to conclude, the wealthiest percentiles of the population are further increasing their income as well as their income share, whereas the least wealthy part of the population making up a way higher part of the population appears to have a stagnating income and a decreasing share of national income before tax. This is clear evidence for increasing income inequality in the United States.
Advantages of Economic Inequality
However, a certain degree of inequality can also appear to be of a benefit for a country. Andrew Carnegie, an American Scottish industrialist who built the largest steel company in the world, stated in 1889: “while the law (of competition) may be sometimes hard for the individual, it is best for the race”. On the one hand, his statement argues in favor of the need of a certain degree of inequality as it ensures continuous ambition of the individual to enhance their position in society through hard work, an idea which is especially deeply rooted in the idea of the American Dream which applies the advantages of a certain degree of inequality to the given case of the United States.
Many US Americans appear to deeply believe in getting rewarded for their hard work which higher the incentives for the inhabitants to contribute to improvements and the development of society. This mindset is also being reflected into consideration which shows the extent to which all Americans in general, democrats, low-income Americans and middle income Americans believe that there need to be differences in payment to make the population work hard. Lead by 62% of the low-income Americans, more than 50% of every surveyed group support the necessity of differences in payment proofing that the a huge part of Americans themselves accept income inequality as they believe that it reinforces ambition to work hard (2007). To conclude, a certain level economic inequality can be beneficial for society and this is seen the same way by a huge part of the US American population.
Disadvantages of Economic Inequality
On the other hand, as the group of inhabitants experiencing the disadvantages of disparities through not succeeding in achieving a desirable position in society, inequality can develop to be less beneficial for society as a whole. A high level of inequality is mirrored in high poverty which is also the case in the USA as the poverty rate describing the percentage of the population earning less than half of the national median income before tax reached nearly 30% in 2015 (Acemoglu, Laibson & List, 2018, p.281).
High poverty rates imply a larger part of the population living under worse living standards and increases the risk of rising criminality as crime often appears as “substitute for legitimate sources of income” (Rosenfeld, 2013). As the sources of income for the bottom 50% appear to fail to increase as the low average income stagnates as described above, the incentives for the less wealthy people to commit crimes as an alternative way to earn money is probable to increase.
Also, “high inequality threatens a country’s political stability because more people are dissatisfied with their economic status, which makes it harder to reach political consensus among population groups with higher and lower incomes” (The World Bank, 2004, p. 31). As the disparities between the wealthiest and poorest further increases in the USA as it did in the past years, this could also become an disadvantage of an increasing relevance.
To sum up, the current development of an rising inequality in the USA is developing towards exceeding an extent to which it is beneficial and rather bringing along disadvantages not only for the less wealthy part of the population, but also for the stability and progress of the nation as a whole.
Taxation: Conflict between eEquity and Efficiency
Trying to avoid or reduce the mentioned disadvantages, governments aim to diminish inequality by means of regulation like taxation although they are in constant conflict between aiming to enhance efficiency on the one hand but improving the nations equity on the other hand. High taxation increases the deadweight loss which appears when suppliers increase prices due to for example rising taxes on producers resulting in a decrease in efficiency which leads to a competitive disadvantage which is expressed in a decrease in the quantity demanded (Acemoglu et. al., 2000, p.292). At the same time, a higher level of taxation enables the government to have an higher influence on the distribution of wealth. As there is an increased amount of public capital to redistribute wealth within the population`s different groups of income, the country benefits from increased equity resulting in a higher capability to decrease the nations inequality.
Comparison Taxation USA vs. Scandinavia
How different taxation rates allow varying influence on the countries equity can be recognized when contrasting the given case study of the USA with highly equal societies in Scandinavia. Comparing the tax rate of Scandinavian countries which varies at a high level between 38% and 50% of the gross domestic product in 2015 (Acemoglu et. al., 2000, p. 281), the rate in the USA was only 26%.
The higher tax rate allows Scandinavian countries to create a more equitable distribution of income and wealth which is being reflected in the different Gini coefficients. The mentioned index indicates the degree of income inequality in a certain country with a value of 0 reflecting perfect equality as every individual earning the same amount of income, and a value of 1 showing the most unequal distribution possible as only one individual earns the full national income (Acemoglu et. al., 2000, p. 281).
Both the Scandinavian countries and the USA have a relatively high Gini Coefficient between approximately 0.4 for Iceland and about 0.53 for the US comparing inequality of income before taxes and transfers(Acemoglu et. al., 2000, p. 281). How the higher tax rate allows a more equal income distribution in Scandinavia can be discovered when taking a closer look at the Gini coefficient for the income after taxes and transfers. Whereas the highest value in Scandinavia was lower than 0.28 in Sweden, the US American value still nearly reached a value of 0.4 in 2015(Acemoglu et. al., 2000, p.281). Because of lower tax rates, the USA lacks capital for generous social welfare programs transferring and redistributing the country`s wealth between the different income groups.
Education System Causing Inequality in the USA
In addition to the given reason of a comparatively low level of taxation, a huge factor driving inequality in the United states is the education system. The quality of education a person received is determining for future career options and income. Many students from low-income families appear to lack higher education which prevents them from earning higher incomes (Berg, 2010). In comparison, “Oxford University has four times the number of students from low-income families as Harvard “(Berg, 2010, p. 43).
Few young adults from low-income families get into or succeed in college because they lack basic knowledge because their high school and parental education was of a lower quality compared to the one of people who grew up in wealthier families and received better education at high school (Berg, 2010). Due to this inequality of high schools, many poorer students miss out attending Advancement Placement courses or preparation for standardized entry tests like the SAT test which are of an high importance in order to succeed getting into college.
To sum up, there is an early segregation of young people dependent on their income through differences in the quality of education which decreases social mobility and leading to increased economic inequality due to limited career perspectives for people born into less wealthy households.
Undoubtely, economic inequality is comparatively high in the USA compared to other developed regions like for example Western Europe or Scandinavia and disparities between the richest and the poorest parts of the population have been rising even further since 1960. Although a certain degree of inequality can encourage ambition to work hard which might be beneficial for the counties development and improvement of the economy and society in general, it appears to also become less of a benefit as there is an increasing part of the population with low incomes who do not succeed in profiting from the arising competing national conditions.
This bears the risk to raise crime rates and conflict between the diverging income groups and the government, decreasing the countries political stability. Early segregation of income groups through varying access to high-quality education is an important factor driving inequality. Because of comparatively low tax rates in contrast to more equitable societies like Scandinavia, the USA also tends to enhance economic efficiency rather than collecting money for redistribution and social welfare programs which would be a mean to reduce the rise of economic disparities. Given the widening gap between the rich and the poor Americans, the government is obligated to reduce the causes increasing the unequal distribution in order to prevent the country from further dividing.