Bobby Hamenda

Task 2 CRWF8000:
You work at one of Americas leading think tanks. You have been asked by your Director to
come up with a proposal for a leading Presidential candidate to take to the US 2016 elections in
regards to inequality. You have been asked to develop a position paper (approximately 1,500
words) justifying why inequality is an important issue, and to come up with a proposed reform
for tackling it.

Inequality is one of the global issues. It has not only been occurring in developing
countries but also in developed countries. Some experts believe that government should
not care about reducing inequality because it is not a crucial thing even equality will
hamper economic growth (Benhabib & others 2003). In contrast, others claim that in
long-run, inequality would slow down economic growth (Castells-Quintana, Royuela &
Ezcurra 2012) because it can bring social problems in society (Tuters 2012, p.131). This
paper will argue why inequality is a serious issue in the United States (US) and the
government should implement policy reforms in taxation and transfer as instruments to
address inequality.

Before discussing more further, it is important to know what economic inequality is?
According to Rose & Sesia (2015, p.2), Economic inequality refers to the concentration
of income or/and wealth that are not distributed equally within a country. Therefore,
from the definition above, it is plausible that income inequality is highly related to
wealth inequality. Another interesting question is, does inequality matter in the US?
Regarding with the question, some following facts will explain whether inequality a
crucial issue or not. Bourguignon (2015) argues that the rapid increase in inequality
within the country has mainly been being caused by globalisation. He claims that global
trade liberalisation has affected to enhance technological progress. Consequently, capital
owner and entrepreneurs earned more profits. Furthermore, he explains that institutional
changes such as the deregulation of markets, tax cuts and structural changes have
exacerbated inequality within a country. For instance, the determination of wages by
labour market where unskilled and low-skilled American workers have been lowering
their wages to deal with labour wages in developing countries.

In terms of distribution, massive cuts in income tax have happened on top earners in
developed countries. For example, in the U.S. under Reagan, in the U.K. under Thatcher
and Sweden in 1991 dropped dramatically from 70% to 40%, 83% to 60%, and 70% to
45%, respectively (Bourguignon 2015, p.92-93). Because of a significant cutting in
taxation, inequality increased significantly in all those countries. The US suffered the
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highest economic inequality (Bourguignon 2015, p.48). Specifically, the 1% richest

Americans earned 8.2% of the national income in 1980, increasing to 19.3% in 2012
(Rose & Sesia 2015, p.3). Meanwhile between 1979 and 2012, the wealth of 0.1%
richest American jumped from 7% to 22%. Similarly, U.S Gini coefficient rose
noticeably from 0.376 in 2007 to 0.401 in 2003 (Bourguignon 2015, p.93; Rose & Sesia
2015, p.3; OECD n.d.).

Therefore, globalisation has forced institutions (rule of the game) to made some
adjustments that influence on markets. For instance, bargaining power of labours that
lead high inequality in the US. The high levels of inequality constitute a serious
problem in the economy because it will spread many adverse effects (market
imperfections, political instability and economic inefficiencies) on low-income citizens
in the U.S. and long-run it will hinder economic growth (Bourguignon 2015, p.132-
134).

Dealing with high inequality that is happening in the US, the government has to make
reforms in taxation and transfer. Regarding taxation, a progressive tax becomes more
effective than proportional tax or regressive tax because high-class citizens pay more.
Progressive tax in the U.S assessed on income and business profit. By applying the
progressive tax, the government should tax wealth instead of wages since it grows faster
than wages. However, the wealth here is mobile, so that make it an international tax
(Piketty 2014). Similarly, in the matter of tax reform, Bourguignon (2015) suggests
more progressive taxation in several levels, have to coordinate internationally,
considering the effect of mobility of wealth (taxing intergenerational transfers).

On the other hand, some people argue that an implication of the policy of high
progressive taxes will stimulate the wealthy to find loopholes and benefit from it. By
finding loopholes, high-income people can take advantages. For example, a billionaire,
Warren Buffett paid his tax bill in 2010 was only about 0.05% instead of 17.3% even
lower than the tax that has paid by his secretary (Propp 2015). However, the new
Treasury has announced a new regulatory about closing tax loopholes that has been
widely exploited by the US companies and high-income people. (Fox News 2016).
President Obama and Congress have given strong support for this legislation. Thus,
there will be no tax loopholes for the US citizens.

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By raising the progressive tax, the income from the wealthy will decrease because they
pay more so that high concentration of revenues into a few people could be reduced.
The high progressive tax would increase low and middle-class citizens income. There
would be an enormous amount of money that can be obtained by the government from
high progressive tax. Indeed, the government has more revenue on its national/federal
budget that can be used for making some transfer payments reforms to assist low-
income people in the US. Therefore, lower-middle income citizens will get more equal
opportunities when receiving transfers/subsidies from the government in enhancing
education sectors, health & healthcare/childcare, public infrastructure and services.

Another objection argument against tax and transfer reforms is the high progressive tax
to the rich will harmful to economic growth. One of the reason is that the rich may less
productive, and investment would fall due to high tax, which in turn the growth of
output will go down. To convince these group of people (could be politicians) refer to
literature as follow. According to Johansson, Heady, Arnold, Brys, et al. (2008), argue
that there link between tax and economic growth. They find out that while there is a
huge range of variation of methods and data sources, the results were mostly consistent.
Besides that, there is a significant adverse impact on taxes and growth of output even
after giving control to a range of various other factors such as government spending,
business cycle conditions, and monetary policy.

Furthermore, in the research has found twenty-six such studies going back to 1983, and
all but three of those studies, and every study in the last fifteen years find a negative
effect of taxes on growth. Of those studies that distinguish between types of taxes,
corporate income taxes are found to be most harmful, followed by personal income
taxes, consumption taxes and property taxes (Johansson, Heady, Arnold, Brys & Vartia
2008).

However, tax and transfer reforms will enable to do two things quite well, reducing
inequality while stimulating long-run economic growth. It will be true if government
use the money from the progressive tax and redistribute it as a transfer payment to the
low-income people (include subsidies and insurances) for in some vital sectors as
following. Firstly, education sectors. Investing human capital is essential. The
government should ensure the equal opportunity will achieve for all children and adults
(which it covers gender equality and disabilities issues) to access the high quality of
education until tertiary level. Secondly, health sectors. Providing high-quality childcare

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for low-income household, and ensure all of them can access basic health and get better
nutrition. Finally, investing in public infrastructure and services while creating a job for
low-income labours. In other words, the government must ensure low-income workers
either youths or adults can access free training opportunities and job. It can be achieved
through providing codes for low-income, implementing tax reforms to the poor (single
parent family, childless adult, noncustodial parents, people with disabilities issues,
ageing population or older adults), improving the safety net for the poor. Hoeller,
Joumard & Koske (2014) support arguments above since they believe that by funding in
essential public services such as social security, health care and education human capital
will help to boost economic growth in long-term economic while reducing inequality.

To sum up, from some reforms that can be taken to addressed inequality in the US, tax
and transfer reforms are chosen because they have indirectly related and discusses other
reforms. Although some people claim that more progressive tax is bad because it will
make the rich unproductive and dampen growth of output, this improvement should be
implemented by the government. The reforms are not only reducing income and wealth
inequality but also inequality in having the same opportunity since the government has
more money to transfer investments in health and healthcare, education, and
infrastructure to low-income American workers. Therefore, if the government employs
these policies, the US will experience low inequality and economic growth increase in
long-run.

(1,390 words)

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References
Benhabib, J & others 2003, The tradeoff between inequality and growth, Annals of
Economics and Finance, vol. 4, pp. 491507.

Bourguignon, F 2015, The Globalization of Inequality, Princeton University Press.

Castells-Quintana, D, Royuela, V & Ezcurra, R 2012, Unemployment and long-run

economic growth: The role of income inequality and urbanisation/Desempleo y
crecimiento econmico a largo plazo: el papel de la desigualdad de ingresos y la
urbanizacin/Comment on Unemployment and Long-run Economic Growth: The Role
of Income Inequality and Urbanisation, by David Castells-Quintana and Vicente
Royuela, Investigaciones Regionales, no. 24, p. 153.

Fox News 2016, Obama praises new Treasury rules that close tax loopholes exploited
by US firms | Fox News, Fox News. viewed 27 April 2016,
<http://www.foxnews.com/politics/2016/04/05/obama-praises-new-treasury-rules-that-
close-tax-loopholes-exploited-by-us-firms.html>.

Hoeller, P, Joumard, I & Koske, I 2014, Reducing income inequality while boosting
economic growth: Can it be done? Evidence from OECD countries, The Singapore
Economic Review, vol. 59, no. 1, p. 1450001.

Johansson, AAsa, Heady, C, Arnold, J, Brys, B & Vartia, L 2008, Taxation and
economic growth, viewed 27 April 2016, <http://www.oecd-
ilibrary.org/economics/taxation-and-economic-growth_241216205486>.

Leigh MP, A 2015, Why should we care about inequality? - 2015 Economic and Social
Policy Lecture, viewed 16 April 2016,
<http://www.andrewleigh.com/why_should_we_care_about_inequality_2015_social_an
d_economic_policy_lecture>.

Mankiw, NG 2013, Defending the one percent, The Journal of Economic Perspectives,
vol. 27, no. 3, pp. 2134.

OECD Income Distribution and Poverty, viewed 26 April 2016,

<http://stats.oecd.org/Index.aspx?DataSetCode=IDD>.

Piketty, T 2014, Capital in the Twenty-First Century, Harvard University Press.

Propp, M 2015, Warren Buffetts Nifty Tax Loophole, viewed 27 April 2016,
<http://www.barrons.com/articles/warren-buffetts-nifty-tax-loophole-1428726092>.

Rose, CS & Sesia, A 2015, Note on economic inequality (2015), Harvard Business
School Background Note 315-050.

Tuters, S 2012, Wilkinson, R., &amp; Pickett, K. (2009). The Spirit Level: Why More
Equal Societies Almost Always Do Better . London: Allen Lane., Leadership and
Policy in Schools, vol. 11, no. 1, pp. 129134.