The risingincome inequality since 1980 has become a major concern among many economists around the world.From 1979 to 2007, after-tax income for the top 1 percent of households grew 275 percent; for the bottom fifth it rose 18 percent. The top 1 percent of earners took home 95 percent of the gains in the first three years of the recovery from the 2008 recession. By 2013, the Fed found that the lower half of U.S. households by wealth held 1 percent of the total while the wealthiest 5 percent held 63 percent.
Economists have proposed different ways to tackle the rising income inequality in the U.S. One strand of view argues for more progressive tax system in the U.S. That is, to tax the rich more and to give the middle class tax relief. This can be seen from President Obama's State of the Union Speech in 2015. The president proposes $1.85 trillion in tax increases, with many of the tax increases focused on high-income earners. In particular, the proposal would increase the top capital gains tax rate from 23.8 percent to 28 percent (37.2 percent in California).[1] Moreover, the proposal calls for Implement the Buffet Rule, or "fair share tax," a 30 percent minimum tax on high-income earners.
The other strand of view questions the effectiveness of more progressive tax system in dealing with the rising inequality. For example, Edward D. Kleinbard in the New York Times and Cathie Jo Martin and Alexander Hertel-Fernandez at Vox argue that focusing on progressivity can be counterproductive, in that tax is distortionary and higher tax on the rich may not necessarily help to boost the tax revenue. Moreover, many of the welfare programs, like social security and medicare in the U.S., already have progressive payout structure, because lower-income beneficiaries get more benefits relative to their contributions than do higher-income ones. Therefore, according to this view, the better response to income disparity, then, is not to tax the rich more, but to boost revenue over all so that government can invest more, and offer higher quality social insurance programs.
In your term paper, please comment on each of the above two approaches. Which approach do you think is better to tackle the income inequality in the U.S.? You may also propose an alternative proposal to address the rising income inequality in the U.S., if you think neither of the above two approaches is the best way to solve the income inequality issue. In this case, you need to explain why neither of them is desirable.
For your argument to be convincing, your analysis should utilize the economic tools developed throughout the semester and supported by the empirical data from the U.S. You are expected to work independently on this assignment. You are also expected to explore academic and government publications and to include references to the literature that you consult for this paper. Sources that you should not consult include blogs and wikis. Academic publications that I recommend for this assignment are American Economic Review, Quarterly Journal of Economics, Journal of Political Economy, Journal of Public Economics, National Tax Journal, Journal of Economic Literature, Journal of Economic Perspectives, and Journal of Policy Analysis and Management.
[1] The current federal top marginal tax rate on long-term capital gains in the United States is 20 percent plus a 3.8 percent tax on unearned income to fund the Affordable Care Act for a total of 23.8 percent for taxpayers with an adjusted gross income of $200,000 ($250,000 married filing jointly) or more.
The paper should consist of the following separate sections, in the same order as follows:
1) An introduction: What questions does the paper try to answer? Why is it important? What has been done in the literature? What is the unique contribution of your paper? In addition, explain briefly (typically a short paragraph in the end of the introduction section) how the presentation of the paper is organized.
2) A survey of the relevant literature: summarize the papers and the main ideas that have been explored by other authors. In some occasions, you may combine this section with the introduction.
3) A description of your contribution. If the paper focuses on empirical analysis, this section should bear a title such as "Data and Methodology," and should describe the source of the data and the statistical or economic methodologies used in the paper to analyze the data. If you are proposing a theory, this section should bear a title such as "The Model," and should present the details of the theoretical model's structure and solution methods.
4) A summary of results: present the main findings of the paper. Make sure that the presentation is precise enough so that anyone reading your paper should be able to replicate your results by using the same data and the same methodology.
5) A conclusion: briefly summarize what has been done in your paper and what you think can be done in the future along the line of research that you have considered.
6) A list of references: should be formatted according to the standard, as exemplified in the reading list.
7) A list of tables and figures: clearly labeled and numbered, should be put on separate pages after the references.