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Feb 13, 2019 in Analysis

Social Problems in American Institutions Essay

Social Problems in American Institutions: Wealth Inequality

Recently, public attention has been riveted to striking income inequality in the US, which is hardly comparable to other developed countries. However, the situation with the wealth distribution is even more unfavorable. The increasing wealth gap between the upper and the middle classes has been rarely addressed in the public debate apart from tax proposals (Ricketts & Waller, 2014). In order to diminish wealth inequality in the US, a complex policy is needed, including wealth redistribution through taxes, improved savings and retirement plans, empowerment of labor unions and investment in education for the middle class.

Wealth is a broad concept that embraces the value of property, inheritance and other financial and non-financial assets. It is wealth not income that is the defining factor with regard to the class status of a person, along with their children. It is, thus, more illustrative of the economic health of particular households and the state on the whole. In the US, the top 10% wealthiest people own more than 75% of the total wealth of the country, which is substantially more than in other advanced nations (Credit Suisse Research Institute, 2013). According to the estimates of Saez and Zucman (2014), in 2012, top 1% of the wealthiest American households owned 40% of all the American wealth, as compared to 34% in 2000 and 30% in 1995. Therefore, over the last decades, the concentration of wealth has been steadily growing and is likely to reach the early XX century levels that preceded the Great Depression. While this measure is primarily dependent on social class, there are also notable variations across race since from 1985 to 2010, the wealth gap between white and African American households almost tripled (Shapiro, Meschede, & Osoro, 2014). The US prides itself on building a meritocratic society, and some degree of wealth inequality is naturally inherent to meritocracy. However, it is difficult to believe that 1% of the population has deserved almost half of the nation’s wealth exclusively due to their skills and knowledge. The primary reason for this overwhelming gap is the U.S. unfettered free market economy, with the contributing factors being inflation, decline of unionization, tax evasion, corruption, and the prevalence of white-collar crime. In fact, the magnitude of this problem is often underestimated. While initiatives have recently been implemented to mediate income inequality (for example, the increase in the minimum wage), wealth inequality has not been addressed on the national level. 

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The goal of our policy is to achieve more adequate wealth distribution across all the five social classes. Undoubtedly, the ideal distribution is 20% of wealth for every class, but, given the current rates, this goal is utopian. In our framework, the top wealthiest quintile (20%) should hold not more than 60% of the total wealth. In fact, this goal is not ambitious, but it is perfectly attainable, as exemplified by Italy, France, Finland, Australia, Canada and other more developed countries (Credit Suisse Research Institute, 2013). Subsequent quintiles should own around 15%, 10%, 10% and 5% respectively, while little prevalence of the upper middle class can be maintained in a meritocratic society. The realistic time frame to achieve this goal is 20 years, but tangible changes should begin within 5 years from the policy implementation. 

Though opinions vary on the efficiency of fiscal policy in addressing the wealth gap, redistribution is indispensable to achieve our goal. The first step to be considered is the imposition of larger taxes on wealth. Currently, there are significant taxes levied on income in the US, but only two forms relate to wealth, namely estate tax and capital gain tax. However, even these two taxes have been eased recently. It is well-known that even a slight increase in taxes on aggregate wealth has the potential to generate a substantial rise in the tax revenue (Wolff, 2002). Apparently, taxing wealth has many economic and ethical implications. Many people believe that it will have a negative impact on the capital formation and make the tax burden unsustainable for rich people who already have to pay their revenue taxes. While these considerations are reasonable, they imply that the wealth tax will target the whole top quintile of the population, which is not necessary. We suggest that only the top 1% with the disproportionate amount of wealth has to be targeted for additional wealth taxes. These people have enormous financial and non-financial assets, so the tax burden will not be excessive for them. Thus, we suggest that at least 5% tax should be imposed on the fortunes larger than a billion dollars, and 3% tax should be imposed on those larger than 10 million dollars. The estate tax, which is levied on the inheritance, should also be enhanced for the wealthiest households. Moreover, the financial transaction tax should be restored for all operations, not only stock transactions. In fact, many people consider the wealth tax to be unethical, as even the largest fortunes may be accumulated with hard work. However, it is quite fair to make the top wealthiest population share their money with the poorest, whatever the sources of this wealth. 

The implementation of this measure will probably raise the prevalence of tax evasion. Even now that the income and wealth taxes are totally bearable for the richest populace, tax evasion and tax fraud are pervasive problems in the US. Therefore, the IRS should devise more severe penalties for these illegal acts, with imprisonment being a more preferred penalty than merely fines. The minimization of tax evasion naturally requires stricter audit of large companies and the elimination of corruption. The legal status of tax avoidance should be revisited, with SEC designing more accurate criteria to define it. Furthermore, money derived from wealth taxes should be allocated in welfare to address the extreme poverty in the US.

However, to address the deficient wealth of the middle class, additional measures have to be taken. Apparently, one efficient method that can substantially decrease both wealth and income inequality is the restoration and development of labor unions. Due to their countervailing power, they can help employees to achieve higher wages and better working conditions. Moreover, unionization creates counterbalance to the excessive compensation of executives in large companies, particularly in the financial sphere. Currently, unionization in the US is in decline and bargaining power of the unions is very low. Thus, middle and large-size companies should be required to increase the employee representation on their company boards. Moreover, employees should be encouraged to negotiate their wages with the management, without any fear of retaliation. Furthermore, a special commission may be created to control and guide the activity of unions in the U.S. most profitable companies with disproportionate compensation for executives.

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A measure of wealth, however, is dependent on savings even more than on income. The middle class should be encouraged to save more in their accounts and retirement plans. Hereby, it is crucial to help the population save for retirement because employer-sponsored retirement plans are accessible to a limited number of employees. The new MyRA plan that is being implemented by the Barack Obama administration can be helpful to urge employees to save more. However, it would also be a viable option to remove tax subsidies for retirement plans, which currently benefit wealthy households and do nothing to help the middle class. Another step to help the middle class save more is to provide comprehensive financial education at schools and colleges to teach people about the basics of investment. In fact, the top wealthiest people gain their fortunes mostly due to their return on assets, not income. Thus, the middle-class population should also be more active in long-term investments. It is vital that citizens in every professional sphere understand how to build a reliable non-risky portfolio and avoid being defrauded by brokers. Consequently, investment competence will enable the middle class to increase their overall assets and achieve more social security, as they will no longer be totally dependent on their wages. 

Wealth inequality is undoubtedly one of the most pressing problems in the American society, along with income inequality. One percent of the whole population holds almost a half of the total nation’s wealth, while millions of people have to survive on minimal wages, having no assets apart from them. It would be idealistic to surmise that equality can ever be reached in our society, but, at least, it is possible to reduce the wealth gap to the level of other developed countries. The introduction of new wealth taxes for the top richest households and stricter penalties for tax evasion are necessary to redistribute wealth to other social classes. The development of stronger labor unions at large companies can help to diminish the gap between of employee and executive compensation. Improved saving and retirement plans, as well as investment education can give the middle class more opportunities to increase their assets. 

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