Wealth inequality is one of the major causes of concern for economic and legal policymakers in the USA at the moment. This has been a political hotbed in the current election cycle and while a lot of rhetoric has been thrown around by the candidates, none have discussed the issue at its economic core. While theoretical public finance discussions don’t make for good soundbites, this topic has been the platform on which the two most extreme campaigns are standing on. In the blue corner we have Bernie Sanders and in the red corner we have Donald Trump. While the mental image of the two squaring off for 12 rounds in a heavyweight title fight may be amusing, the political war of words has erupted into full blown combat. At the most recent Trump rally in Chicago Anti-Trump Protestors (many of whom supporters of Sen. Sanders) and Trump supporters came to blows. Fundamentally speaking the two candidates share similar politics; both are antiestablishment mavericks with disdain for the current system which both have deemed “corrupt.” They differ on issues such as immigration reform, foreign policy and whether or not they can force Mexico to pay for a wall along the USA’s southern border, but most notably the two differ in terms of wealth distribution.
Just how real is the issue of wealth inequality? In the United States almost 75% of all net worth is concentrated on the top 10% of individuals. In the last two years the top 15 individuals in the US have seen their wealth grow by a greater percentage than the bottom 40% have in total. Exacerbated by a shrinking middle class and decreasing median family income, this issue has led to increased tension and threat of “class warfare.” This term calls back to the Marxist Proletariat rising up against a modern Bourgeoisie. In short, people are angry. The obvious threat of physical violence is paramount, but more subtle risks exist as well. Many economists believe that large disparities in income are a direct affront to democracy, the foundation upon which the US was built. Fundamentally at large gaps in income citizens no longer have an equal impact on policy decisions made by their government. In fact, “when a majority of citizens disagree with economic elites and/or with organized interests, they generally lose” (Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens). This sounds more like Oligarchy than Democracy. On this topic renown Economist Thomas Piketty stated "extremely high levels of wealth inequality are incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies." The status quo needs to change to a structure that favors democracy and meritocracy, the core tenets of the United States. Theory of Public Finance would suggest that there are some core policies that can be changed to deal with income inequality. The primary factors which impact wealth distribution are tax structure and government welfare programs, with tax being a passive approach and welfare being an active approach.
In the past, the conservative candidates have boasted either a better understanding of economic and financial policy or at least a common belief that this was the case, however there may not be any evidence to support this claim any longer. Fundamentally Trump supports Stockman/Reagan era “Trickle-Down Economics” which provides tax cuts to wealthy individuals in an effort to have them spend their newly retained wealth to generate additional demand for goods in the market, thus creating new jobs to create the supply. Trump also advocates cutting government welfare programs. The idea behind his plan is that the reduced tax and government spending will stimulate new growth in the economy and as JFK once put it “a rising tide will lift all ships.” Sanders favors a progressive, somewhat European tax structure which seeks to provide tax breaks to those in the lower income brackets, maintain the tax rate on the middle class and incorporate increased taxes on the wealth (which he defines as those making more than $250,000). Using this increased tax revenue, Sanders plans to create new jobs and provide additional government welfare programs to help those in need. This plan takes the burden of economic stimulation off of the market’s shoulders and forces the growth directly.
So when the bell rings how do these two policies stack up? While many of his supporters claim that Trump is the de facto “king of money” due to his past business ventures, there is a catalogue of evidence to support the claim that Trickle-Down Economics simply do not work. Critics such as Era Dabla-Norris of the International Monetary Fund noted “If the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth” (Causes and Consequences of Income Inequality: A Global Perspective). The paper goes on to point out that the wealthy have a higher propensity to save than do the poor when offered marginal raises in income (for each dollar given in tax breaks to the poor more money is spent than if the same dollar was given to a wealth individual). This is common sense when you consider that as levels of income increase the less percentage you need for your day to day spending to sustain or improve your lifestyle. The poor’s increased propensity to spend may also stimulate the economy in other ways as it also increases the velocity of money (the number of times a dollar is used to purchase final goods and services that contribute to the nation’s GDP).
On other side of the ticket Sanders’ plan is much more progressive, but is met with extreme resistance from Wall Street (displayed by their large contributions to his competitors). Though “the street” isn’t backing the Brooklyn born politician, several economists have come out in favor of his proposed fiscal policy. Notably, Asher Edelman (the person which Gordon Gekko was based off of) came out in favor of Sanders’ economic reform specifically because it stimulated the velocity of money. From Edelman’s perspective the tax breaks going to rich is killing the consumer base and by easing the tax burden on the poor, new consumers will enter the market. Sanders’ plan also takes advantage of the relatively low interest rates on US Treasury Bills as any tax gaps will be funded through sovereign debt. However, the merit of a government funding projects through debt and running a budget deficit is the topic for another day.
Mike Gallino
Just how real is the issue of wealth inequality? In the United States almost 75% of all net worth is concentrated on the top 10% of individuals. In the last two years the top 15 individuals in the US have seen their wealth grow by a greater percentage than the bottom 40% have in total. Exacerbated by a shrinking middle class and decreasing median family income, this issue has led to increased tension and threat of “class warfare.” This term calls back to the Marxist Proletariat rising up against a modern Bourgeoisie. In short, people are angry. The obvious threat of physical violence is paramount, but more subtle risks exist as well. Many economists believe that large disparities in income are a direct affront to democracy, the foundation upon which the US was built. Fundamentally at large gaps in income citizens no longer have an equal impact on policy decisions made by their government. In fact, “when a majority of citizens disagree with economic elites and/or with organized interests, they generally lose” (Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens). This sounds more like Oligarchy than Democracy. On this topic renown Economist Thomas Piketty stated "extremely high levels of wealth inequality are incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies." The status quo needs to change to a structure that favors democracy and meritocracy, the core tenets of the United States. Theory of Public Finance would suggest that there are some core policies that can be changed to deal with income inequality. The primary factors which impact wealth distribution are tax structure and government welfare programs, with tax being a passive approach and welfare being an active approach.
In the past, the conservative candidates have boasted either a better understanding of economic and financial policy or at least a common belief that this was the case, however there may not be any evidence to support this claim any longer. Fundamentally Trump supports Stockman/Reagan era “Trickle-Down Economics” which provides tax cuts to wealthy individuals in an effort to have them spend their newly retained wealth to generate additional demand for goods in the market, thus creating new jobs to create the supply. Trump also advocates cutting government welfare programs. The idea behind his plan is that the reduced tax and government spending will stimulate new growth in the economy and as JFK once put it “a rising tide will lift all ships.” Sanders favors a progressive, somewhat European tax structure which seeks to provide tax breaks to those in the lower income brackets, maintain the tax rate on the middle class and incorporate increased taxes on the wealth (which he defines as those making more than $250,000). Using this increased tax revenue, Sanders plans to create new jobs and provide additional government welfare programs to help those in need. This plan takes the burden of economic stimulation off of the market’s shoulders and forces the growth directly.
So when the bell rings how do these two policies stack up? While many of his supporters claim that Trump is the de facto “king of money” due to his past business ventures, there is a catalogue of evidence to support the claim that Trickle-Down Economics simply do not work. Critics such as Era Dabla-Norris of the International Monetary Fund noted “If the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth” (Causes and Consequences of Income Inequality: A Global Perspective). The paper goes on to point out that the wealthy have a higher propensity to save than do the poor when offered marginal raises in income (for each dollar given in tax breaks to the poor more money is spent than if the same dollar was given to a wealth individual). This is common sense when you consider that as levels of income increase the less percentage you need for your day to day spending to sustain or improve your lifestyle. The poor’s increased propensity to spend may also stimulate the economy in other ways as it also increases the velocity of money (the number of times a dollar is used to purchase final goods and services that contribute to the nation’s GDP).
On other side of the ticket Sanders’ plan is much more progressive, but is met with extreme resistance from Wall Street (displayed by their large contributions to his competitors). Though “the street” isn’t backing the Brooklyn born politician, several economists have come out in favor of his proposed fiscal policy. Notably, Asher Edelman (the person which Gordon Gekko was based off of) came out in favor of Sanders’ economic reform specifically because it stimulated the velocity of money. From Edelman’s perspective the tax breaks going to rich is killing the consumer base and by easing the tax burden on the poor, new consumers will enter the market. Sanders’ plan also takes advantage of the relatively low interest rates on US Treasury Bills as any tax gaps will be funded through sovereign debt. However, the merit of a government funding projects through debt and running a budget deficit is the topic for another day.
Mike Gallino