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  • Emily Dow

Don't blame the rich! Blame the system (they created...)

The UC Berkeley Economist recently analysed data revealing Americans with incomes in the top 10% earn, on average, nine-fold of the remaining 90%. At the top end of this 10% are the ultra-wealthy individuals, who do not receive income via the normal streams the vast majority of citizens do - they live off of things such as financial derivatives or loans. Under the US income tax policy, these modes of income are not taxable since they are not income cheques. With poverty levels plateauing in the past 50 years in the US yet the top 1% seeing a near doubling of their wealth, who is accountable for the lack of tax paid by the top 1%? Over 140 million people in the US are classed as low-income and this has generated hatred for the HNW individuals who seem to get the best of both worlds: an extremely high annual ‘income’ and very little tax burden. However, investigating the system reveals an unproductive misdirection of this blame.


The challenging of this injustice is often directed towards the ultra-wealthy, rather than the policymakers and tax system in which everybody must abide. The disproportion within the system skewed towards the rich should not be overlooked, however the flaws lie within the operation of the system rather than the rich who use it. The tax system, which yes, is funded, largely created and influenced by a few powerful individuals in society is what needs adjustment to hold these ultra-wealthy individuals accountable for their large accumulation of wealth. Due to the democratic nature of US political system and increasing admission by some of these HNW individuals (such as Morris Pearl, a writer for the FT), this should be possible. The tax structure restricts income to the narrowest definition; it taxes progressively (meaning the more you earn the more tax you pay) based on official income cheques. This excuses wealthy individuals who are receiving and living off the ‘income’ their capital provides them from paying income taxes. Approaching the issue via this angle allows a different perspective to be appreciated such that the wealthy are not actively tax evading, instead the system is engineered in a way which allows their main source of income to be almost untaxable, well, at least to the extent in which conventional income is taxed. The US currently have seven income tax rates, ranging from 10-37%. So, how is it that the 25 wealthiest Americans racked up $40 billion in wealth over a four-year period (2014-18), yet managed to pay only 3.4% in taxes? As suggested earlier, these individuals have a different source of ‘income’ which doesn’t fall under the restrictive definition the US income tax system states. This means that unless they sell their assets, in which they’d be subject to capital gains tax, they have no legal obligation to pay any sort of progressive income tax, despite their means of ‘income’, in the broader sense, is funded from their accumulated wealth in assets. This highlights an error in the system – ultra-wealthy individuals need to make no active effort to not pay a form of income tax, the system is designed to give them the privilege of a free-pass; this makes sense, since they orchestrated it to do so. When HNW individuals don’t sell their assets, they receive all of the increase in value and therefore accumulate wealth - which the policymakers have decided is different from income - without any tax burden. This presents a dichotomy between wealth and income, rather than treating them as the same thing since, debatably, they serve the same purpose which is it is used to achieve a certain standard of living. It’s difficult to accept this policy error is through pure ignorance by the US government, and therefore there must be some bias towards the ultra-wealthy in US policy decision-making which creates direct, isolated advantages for this minority. to reiterate, this can largely be attributed to the fact that the the funding and operation of the tax system is dominated by rich and powerful individuals, however the point remains that it is the system created by these individuals which needs to change, not individual's actions. There is very little 'tax evasion', instead a system designed to allow them to bypass income tax. This is becoming an increasing issue.


It’s easy to understand how this oversight or deliberate policy manipulation (depending on your chosen stance and faith in the US government) only amplifies and expedites disparities in income. The most immediate and direct consequence of this is a hindrance on growth and sustainability. In a 2015 study by the IMF, they linked greater income inequality with lower rates of growth. They supported this statement by analysing increases in income at both ends of the scale, with a 1% increase in income of the top 20% and a 1% increase in the bottom 20%. In the first case, over the course of five years growth decreased by 0.08% whereas in the second case growth increased by 0.38%. This provides evidence to suggest the benefits of an increase in income which expands income inequality are not seen in the overall economy. On the contrary, where an increase in income occurs which diminishes income inequalities, benefits are visible in growth figures and the overall state of the economy. Although it would be unrealistic for a country to strive for a Gini coefficient of 0 (meaning there is no income inequality whatsoever, everybody earns the same), inequality is not as much of a ‘necessary evil’ as sometimes perceived. Too much inequality can have adverse social and economic costs which can derail society’s trust in the system, government, and interfere with their confidence about the future which will only encourage economic and financial instability.


Sources used:

https://inequality.org/facts/income-inequality/

https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf

https://www.ft.com/content/c6edf7c7-c3ed-4db4-ade1-77e3761795a6

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