There’s a lot of talk these days about the income gap between the rich and the not-so-rich. At the top end, salaries and bonuses are measured in the tens of millions, while the minimum wage remains at $7.25 an hour, where it has been since 2009.
Nowhere among advanced countries is the gap greater or growing faster than in the United States. Reducing the gap is one reason for the drive to increase the minimum wage.
Some see a growing income gap as giving the wealthy economic and political power to dominate the lives of the rest of the population. Such an outcome could undermine democracy and lead to bad decisions on matters ranging from the environment to health care, they say.
Along comes French economist Thomas Piketty. Chances are you have never heard of him, but he is one of the hottest thinkers around these days. Some economists call him a “rock star.” He focuses on the increasing gap between the wealthiest and the poorest people.
The income spread could be reduced by increasing pay at the bottom. While that could help, Piketty’s best-selling book goes much further.
Because the wealthiest people receive incomes greater than they need to live on, they save some of what they make. Their savings go into investments producing even more wealth, gained without their having to put in any more work.
The rest of the people must live on their incomes, so have little or nothing to invest. The result is their incomes grow slowly, dependent on pay raises and not much on income from investments.
After World War II, the gap between the wealthy and others declined in the United States, because of extremely high tax rates on those with high incomes. The rich had less money available to make themselves wealthier.
But, since then, changes in tax rates have benefited the wealthiest people more than any other group. While a considerable number of workers now mainly pay payroll taxes and little or no income tax, the amount of their tax relief is small compared to the cuts for the rich.
The top tax rate for the wealthy has fallen from 94 percent to 39.6 percent of their taxable income.
Piketty opposes massive wealth, believes the income gap should be reduced, and proposes two solutions.
You could reduce the gap between rich and poor, if you took away some of the wealth of the rich. Piketty suggests a wealth tax, kicking in at about $1.4 million. By taking money away from the wealthy, you could reduce the gap and their clout.
What would be done with the revenues? It could fund a higher minimum wage for the millions working for governments at all levels. It could funnel more help to those at the bottom of the ladder.
In short, Piketty’s wealth tax might lead to income redistribution. In a country where virtually any government service may be branded as “socialist,” the American income gap is unlikely to be reduced by redistribution.
Money will not go from the investment accounts of the wealthiest into the paychecks of low-income workers.
The advocates of amassing wealth say the wealthy will make investments in companies creating jobs for many others. But those may be in China or, through technology investment, companies may reduce their need for labor.
Piketty’s alternative solution may be more realistic. He sees the wealthy also having more than others of one form of capital – education. In his ideal formula, higher taxes on wealth could fund greater access to education.
With more and better education, people could develop their own businesses or become qualified for new, higher paying technological jobs. In other words, they would begin to have the kind of opportunities now more readily available to the rich and, in the process, reduce the income gap.
While the wealth tax idea is likely to go nowhere, at least in the United States, improving education is both reasonable and possible. And it pays off. There’s plenty of proof that the better educated you are, the higher your income.
The United States now lags behind other countries in basic education – math and language. Yet, in some respects, this country is making progress.
A high school education is no longer enough. Community colleges are booming, because they produce graduates trained to meet the most current needs. Maine’s are a great example of this.
With his wealth tax, Piketty may not understand how America works, but, with his emphasis on education, he does have a good idea about how to get America back to work.