Wealth Inequality Greatly Exacerbated Tax System

By Lyheng Phey

The existing tax structure is one of the primary causes of wealth gap in the United States. We all understand that we have to pay taxes to the government every year. That means we have to give away some of what we earn to the government. Although it is important to acknowledge that total income differs from earned wages. Total income includes investments, and other payments like trusts or capital gains, whereas earned income is only wages. Additionally there are many different types of taxes. For this reason, many people still do not understand the deeper meaning of how the tax structure in the United States works, and the effects it has on the economy and individual wealth.

In order to better understand the tax structure, first we must understand the concept of income redistribution because they are very closely related. Income redistribution refers to the amount of money that the government spends for and on citizens after they have paid taxes. The main point here is to understand and compare how much the families at different income levels pay in taxes from state and local through federal taxes, and consequently the different amounts they get back from the government in terms of public services, infrastructure, social security, medical services, and national defense.

People at different income level pay different amounts of money for both their state and federal taxes, and they receive different amounts in return from the government. For instance, we discover that the government tax and spending policy are determined by the families in the top 40% because they redistribute over $2 trillion to the bottom 60% each year. From this information, we can assume that the rich contribute more money to the government’s spending policy. In order to support the assumption above, let’s take a look the description of government spending in 2012. ScsS

Source: taxfoundation.org

According to this graph, we see clearly that the huge amount of government revenue comes from  the top 1%. The study shows that in 2012 alone, the top 1% families earned 18.2 percent of the nation’s income which is about $2.3 trillion. The government tax and spending policy take about $924 million from them, about 40 percent from their market income. On the other hand, the bottom 20% who earn about 3.1 percent of the nation’s income; instead of their money being taken away, they actually receive a proportionally larger benefit from the government. The redistribution increases their incomes by $1.1 trillion or about 74 percent. Thus, the redistribution helps them to increase their available share of nation’s income. This also works in the same way to the middle income families. In fact, this group of income families earn 14 percent of the nation’s income in 2012, but redistribution added $297 billion to their income. Therefore their income share about 16.4 percent to the nation’s income. Overall, we can conclude that the top 1% plays a huge role in income redistribution or government’s spending policy.

Now that we have a better idea of how taxation influences wealth redistribution through government taxing and spending, let’s talk about the actual tax structure. In the United States, governments at all different levels require their citizens to file and pay taxes each year. Some people will likely come up with the question: what will the governments do with that huge amount of money (revenue) from their people? To those who do not know the answer, I will briefly tell you some of reasons. There are millions of people in this country;  therefore the various levels of government have the responsibility to make sure that all of the people will receive a fair amount of benefits based on their needs and income. Governments take those huge sums of tax revenues, then divide it among different spending areas to benefit the country and different subgroups of the population. Of the many groups in the United States, many people depend on some sort of direct assistance, and all people depend on government programs that keep the country functioning. Some of these groups include: new immigrants, people who can not afford their living, disable people, retired people, senior; and some of the programs include education, health care programs, salaries to people who working for government itself, and defense. We see that the government needs a lot of money to sustain its country and people.

Through it all,  people with different income levels are paying proportional amounts for their taxes based on their income, and receiving proportional amounts based on their needs.

The wealth gap started to increase when wages across certain sectors of the economy increased at a rate disproportionate to that of all the others, allowing some people to earn vastly higher incomes than others. But what about redistribution? Isn’t it helping to make the gap smaller?

The answer of this question is the income redistribution is not really helping to decrease the wealth gap in the United States.

According to the Central Intelligence Agency, income distribution in the United States is more unequal than any other countries including places like Guyana, Nicaragua, Venezuela, Germany, France and the United Kingdom.

In order to better understand how wealth redistribution through taxation is not curbing the wealth gap but increasing it, let’s revisit the definition of wealth. In general language, wealth can be defined as the value of everything that people have or own, subtracting any debts or liabilities. It has been understood that a person who is wealthy does not always have a high earned income, but people at the top of the wealth distribution usually have a high income through other (unearned) sources. In other words, for the top rich people income is not always come from working. They tend to come from investments. “ In 2008, only 19% of the income reported by the 13,480 individuals or famiilies making over $10 miillion came from wages and salaries,” ucsc.edu/whorulesamerica/power/wealth.

It is absolutely untrue that the top percent people pay more taxes to the federal government than lower and middle income people groups. The reason of this is that the tax system is primarily based on the payroll taxes which are paid in particular by the people with an income that is less than $100,000 per year.

A teacher who teaches in one public high school in Berkeley pays about 30 percent of their overall income. However, the capital gains tax rate is only about 15 percent of their investment. Recently, it has become a joke that people often like to talk about; A factory owner who is among the top 1% cannot find any of their workers who paid less tax than him.

The research also supports this idea in many ways. According to Citizens for Tax Justice in Washington ucsc.edu/whorulesamerica/power/wealth.html, the lowest 20 percent of earners, whose income is approximately $12,400 per year, contributed 16.0% of their income to taxes in 2009. The next 20 percent, whose income is approximately $25,000 per year, contributed 20.5 percent in taxes. From these two factors, we see that the tax system seems like it is liberal. If we keep looking, it is still liberal for middle income learner the next 20 percent, whose income is about $33,400 per year, contributed 25.3 percent of all their income to taxes. In addition the next 20 percent, who is about $66,000 per year, paid 28.5 percent. Thus the tax system looks fair and progressive for the bottom 80 percent of people income levels. However, if we really focus on the top 20 percent of people, we will see that the fairness and progressive character of the tax structure no longer exists. First it grows slowly eventually it starts to stop then falls backward when we take the 1% into account. The 10%, whose income is about $100,000 per year, pay 30.2 percent of their overall income to taxes. The next 5% who have an income of roughly about $141,000 a year pay only 31.2 percent of their earning income to taxes. From here we see that the tax structure’s fairness is slowing down. As for the top 1% who learn an average is about $1.3 million per year, they pay just 30.8 percent of their $1.3 million to taxes, which is less than the 9% who is below them pay and also little bit higher than between 80% and 90% pay.

Source: ucsc.edu/whoruleamerica.com

In conclusion, we see that the top percent of rich people are actually paying less taxes than the bottom percent and middle income people. In addition, the wealth distribution is also not proportional when we compare the bottom 90% with the top 10% even though the top percent people are being taken away some of their money by the government’s spending program. The taxes structure also does not work very well when it is time to take taxes from people of different income level. These top percent of people still have ways to maintain their money by avoiding paying taxes and of course they are not going to get poor easily even they pay more taxes than they are paying currently.

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