Tax

By Lyheng Phey

The existing tax structure is one of the primary causes of wealth gap in the United States. We all understand that we have to pay taxes to the government every year. That means we have to give away some of what we earn to the government. Although it is important to acknowledge that total income differs from earned wages. Total income includes investments, and other payments like trusts or capital gains, whereas earned income is only wages. Additionally there are many different types of taxes. For this reason, many people still do not understand the deeper meaning of how the tax structure in the United States works, and the effects it has on the economy and individual wealth.

In order to better understand the tax structure, first we must understand the concept of income redistribution because they are very closely related. Income redistribution refers to the amount of money that the government spends for and on citizens after they have paid taxes. The main point here is to understand and compare how much the families at different income levels pay in taxes from state and local through federal taxes, and consequently the different amounts they get back from the government in terms of public services, infrastructure, social security, medical services, and national defense.

People at different income level pay different amounts of money for both their state and federal taxes, and they receive different amounts in return from the government. For instance, we discover that the government tax and spending policy are determined by the families in the top 40% because they redistribute over $2 trillion to the bottom 60% each year. From this information, we can assume that the rich contribute more money to the government’s spending policy. In order to support the assumption above, let’s take a look the description of government spending in 2012. ScsS

Source: taxfoundation.org

According to this graph, we see clearly that the huge amount of government revenue comes from  the top 1%. The study shows that in 2012 alone, the top 1% families earned 18.2 percent of the nation’s income which is about $2.3 trillion. The government tax and spending policy take about $924 million from them, about 40 percent from their market income. On the other hand, the bottom 20% who earn about 3.1 percent of the nation’s income; instead of their money being taken away, they actually receive a proportionally larger benefit from the government. The redistribution increases their incomes by $1.1 trillion or about 74 percent. Thus, the redistribution helps them to increase their available share of nation’s income. This also works in the same way to the middle income families. In fact, this group of income families earn 14 percent of the nation’s income in 2012, but redistribution added $297 billion to their income. Therefore their income share about 16.4 percent to the nation’s income. Overall, we can conclude that the top 1% plays a huge role in income redistribution or government’s spending policy.

Now that we have a better idea of how taxation influences wealth redistribution through government taxing and spending, let’s talk about the actual tax structure. In the United States, governments at all different levels require their citizens to file and pay taxes each year. Some people will likely come up with the question: what will the governments do with that huge amount of money (revenue) from their people? To those who do not know the answer, I will briefly tell you some of reasons. There are millions of people in this country;  therefore the various levels of government have the responsibility to make sure that all of the people will receive a fair amount of benefits based on their needs and income. Governments take those huge sums of tax revenues, then divide it among different spending areas to benefit the country and different subgroups of the population. Of the many groups in the United States, many people depend on some sort of direct assistance, and all people depend on government programs that keep the country functioning. Some of these groups include: new immigrants, people who can not afford their living, disable people, retired people, senior; and some of the programs include education, health care programs, salaries to people who working for government itself, and defense. We see that the government needs a lot of money to sustain its country and people.

Through it all,  people with different income levels are paying proportional amounts for their taxes based on their income, and receiving proportional amounts based on their needs.

The wealth gap started to increase when wages across certain sectors of the economy increased at a rate disproportionate to that of all the others, allowing some people to earn vastly higher incomes than others. But what about redistribution? Isn’t it helping to make the gap smaller?

The answer of this question is the income redistribution is not really helping to decrease the wealth gap in the United States.

According to the Central Intelligence Agency, income distribution in the United States is more unequal than any other countries including places like Guyana, Nicaragua, Venezuela, Germany, France and the United Kingdom.

In order to better understand how wealth redistribution through taxation is not curbing the wealth gap but increasing it, let’s revisit the definition of wealth. In general language, wealth can be defined as the value of everything that people have or own, subtracting any debts or liabilities. It has been understood that a person who is wealthy does not always have a high earned income, but people at the top of the wealth distribution usually have a high income through other (unearned) sources. In other words, for the top rich people income is not always come from working. They tend to come from investments. “ In 2008, only 19% of the income reported by the 13,480 individuals or famiilies making over $10 miillion came from wages and salaries,” ucsc.edu/whorulesamerica/power/wealth.

It is absolutely untrue that the top percent people pay more taxes to the federal government than lower and middle income people groups. The reason of this is that the tax system is primarily based on the payroll taxes which are paid in particular by the people with an income that is less than $100,000 per year.

A teacher who teaches in one public high school in Berkeley pays about 30 percent of their overall income. However, the capital gains tax rate is only about 15 percent of their investment. Recently, it has become a joke that people often like to talk about; A factory owner who is among the top 1% cannot find any of their workers who paid less tax than him.

The research also supports this idea in many ways. According to Citizens for Tax Justice in Washington ucsc.edu/whorulesamerica/power/wealth.html, the lowest 20 percent of earners, whose income is approximately $12,400 per year, contributed 16.0% of their income to taxes in 2009. The next 20 percent, whose income is approximately $25,000 per year, contributed 20.5 percent in taxes. From these two factors, we see that the tax system seems like it is liberal. If we keep looking, it is still liberal for middle income learner the next 20 percent, whose income is about $33,400 per year, contributed 25.3 percent of all their income to taxes. In addition the next 20 percent, who is about $66,000 per year, paid 28.5 percent. Thus the tax system looks fair and progressive for the bottom 80 percent of people income levels. However, if we really focus on the top 20 percent of people, we will see that the fairness and progressive character of the tax structure no longer exists. First it grows slowly eventually it starts to stop then falls backward when we take the 1% into account. The 10%, whose income is about $100,000 per year, pay 30.2 percent of their overall income to taxes. The next 5% who have an income of roughly about $141,000 a year pay only 31.2 percent of their earning income to taxes. From here we see that the tax structure’s fairness is slowing down. As for the top 1% who learn an average is about $1.3 million per year, they pay just 30.8 percent of their $1.3 million to taxes, which is less than the 9% who is below them pay and also little bit higher than between 80% and 90% pay.

Source: ucsc.edu/whoruleamerica.com

In conclusion, we see that the top percent of rich people are actually paying less taxes than the bottom percent and middle income people. In addition, the wealth distribution is also not proportional when we compare the bottom 90% with the top 10% even though the top percent people are being taken away some of their money by the government’s spending program. The taxes structure also does not work very well when it is time to take taxes from people of different income level. These top percent of people still have ways to maintain their money by avoiding paying taxes and of course they are not going to get poor easily even they pay more taxes than they are paying currently.

Source: Citizens for Tax Justice (2010)

http://www2.ucsc.edu/whorulesamerica/power/wealth.html

http://www.slate.com/articles/news_and_politics/the_great_divergence/features/2010/the_united_states_of_inequality/introducing_the_great_divergence.html

http://elsa.berkeley.edu/~saez/pikettyqje.pdf

http://taxfoundation.org/article/distribution-tax-and-spending-policies-united-state

http://money.cnn.com/video/news/2013/01/17/n-tax-changes-2013-reform.cnnmoney/

Interest Rate

By Hayden Kan

Since the 19th century, most of our activities such as shopping, living and investing are led by interest rate, a fee for borrowing money from financial institutions or banks. When the economy worsens and economic growth stagnates, banks will lower their interest rates to encourage people to borrow money because the cost of borrowing is so much less. This action can kick-start a weak economy because low interest rate urges traders and customers to make more transactions . However, in order to increase the rate of the economy growth, merchants or customers need a large sum of capital to support it, so they can use leveraging during trading, which can help them to earn a higher profit for their next trade. A great way to achieve this is the low interest rate, therefore businessmen and customers can borrow a larger sum of money to purchase and sell goods and services. Unfortunately, low interest rate can’t last forever because it will speed up the process of inflation and will weaken banks’ financial structure. That’s why banks will tighten their interest rate at some situations. It sounds reasonable because this can curtail the number of approving new loans to people who don’t really need extra money and diminish the pressure of keeping up with the inflation rate on general public themselves. However, banks are applying this tactic as a shortcut to gain and concentrate properties and wealth for themselves.

Low interest rates are tempting to businessmen and also, teenagers and people with poor credit. At this point, you may ask, “Why would the banks lend money to people who have poor credit, which is a very big risk?” The answer is simple, debt is money. From the graph below, “Percent of Assets Held by Wealth Class in the United States in 2007” by Wolff, it shows two major points about the wealth distribution, which is the disparity of possession of assets of each social class between the wealthier class and the lower income class.

 Assets own by the top 1% are almost equal to the debt on the lower income population. Also, the top 1% and the better off 90-99% are major investors in the market. They won’t waste time on saving money in bank, they buy securities and stocks instead. It means that what we are doing is providing decent lives for the richest in the USA while they are causing financial crisis for us. Besides that, since the top 1% is the major players in the financial market,  their influence is extremely vast. In this article, “Wealth Inequality” from inequality.org mentions the situation of the inequality of wealth in the US and ratio of the stocks own by Americans. While the top 1% owns 38.2% of shares in the stock market, the combine of stocks own by the bottom 60% to 80-90 percentile is only 18.8%. The disparity of stocks ownership between the richest and regular US citizens is distinctively wide and abnormal, which make investors like our parents have literally no major influence to the market at all.

Return to the problem of the interest rate, although there is no doubt that lending has positive effects on trading and manufacturing, there is a major fault in the system, which is the interest rate. When a person is borrowing money from a bank, there is an agreement on paying back the principal with a certain amount of interest as a service fee and promise on the loan. The problem is, the “interest” does not exist initially. The system will come to a halt eventually when there is no extra cash to fill up the interest.  So, in order to keep this system functioning, central banks need to print more money to postpone the deadline of the collapsing banking system. However, when anything becomes too readily available, its price will drop. This will cause inflation. From the graph, “Inflation and Interest Rates” by ONS Bank of England it is clear that most of the time,  when interest rates are high, inflation rates will stay lower than the interest rate. That means when the interest rate is unaffordable for borrowers, it can frighten them and diminish their interest in borrowing forcing borrowers to rethink their need for cash, their motivations for spending and their financial plans.

                      

High interest rates can definitely reduce the risk of having a catastrophe in the debilitated banking system due to the decreasing demand on loans. However, it will, nevertheless, defer the progress of any business activities by adding costs and expenses on both companies and customers themselves. In this case, companies will be likely to search for alternatives to minimize their cost and remain competitive. Outsourcing is their answer. Since the high interest rate is not affecting other developing countries and these countries have a huge army of low paid workers, enterprises build factories and offices in these new territories for keeping their cost low. Beside lowering the cost and remaining competitive, outsourcing can also create jobs in developing countries like China, Vietnam, Cambodia and India.

However, this makes the basic level and the lower middle class lose jobs in the State. An article, “ 4 Ways Outsourcing Damages Industry ”, by  Angie Mohr from investopedia describes, “ Jobs that move offshore often do not come back. The lower wages and operating costs, plus the simpler administrative requirements in countries such as India and Russia, make operating in those countries cheaper and easier. Without new jobs being created in America, unemployment rises and a higher base unemployment rate becomes the norm. It could be decades before developing countries reach their saturation point and wages are driven higher. In the meantime, more American workers are out of work with few prospects of landing a job”, which means since jobs have been moved out from America, it is not going to come back in an eon. Also, when other countries’ currencies are lower the the dollar, it is tempting for companies to move production lines and customer servicer countries’ currencies and salaries are  centres to these developing countries. These movements can also lower US  workers’ skills because there isn’t any place for them to learn and practice their skill and knowledge.

It is important to realise that interest rate has a substantial effects to our daily life that it should not be sneezed at. It cannot be denied that low interest can benefit the public and businesses, however we need to learn how to adjust our spending plans and the interest rate.

Sources:

1.http://www.youtube.com/watch?v=f0ehzfQ4hAQ (Youtube Video)

2.http://econ.economicshelp.org/2011_11_01_archive.html (Inflation and Interest Rates)

3.http://www.businessweek.com/articles/2012-03-15/outsourcing-a-passage-out-of-india (Map of wages by Business week)

4.http://www.isaca.org/Journal/Past-Issues/2005/Volume-5/Pages/Outsourcing-A-Risk-Management-Perspective1.aspx ( Drivers of Outsourcing)

5.http://www.investopedia.com/financial-edge/0312/4-ways-outsourcing-damages-industry.aspx (4 Ways Outsourcing Damages Industry)

Institutional Racism

By Junming Li

During slavery, most slaves weren’t allowed to accumulate any assets. Today, after more than a hundred of years, the problem has transformed into a kind of racism based on economic opportunities. In fact, the problem has grown much more serious than slavery. Institutional racism is one of the primacies that causes wealth inequality in the United States.

According to the graph from Institute on Assets and Social Policy, the inequality by race will be more apparent.

The gap has been increasing since 1984, the trend of the gap seems to be increasing over time. Racism is certainly an issue in America, when it comes to wealth and economic; the issue is even more realistic. Homeownership, unemployment and the recession are accounted as the main factors of causing institutional racism spreads to wealth inequality.

Homeownership indirectly represents one’s wealth, and effectively helps gain assets. Residential segregation and many Federal Housing Acts have caused the housing market be unfair for people of color, therefore limiting access to wealth for those people. Residential segregation still exists in many states and prevents people of color purchasing house in white neighborhoods. The director of Community Reinvestment Program written article, “The Wealth Gap: Why Dr. King’s Dream Is Unfinished”, by Preeti Vissa, analyzes “Jim Crow laws in the south kept most African Americans locked into an economic underclass. In the north, the process was more subtle but just as real, with bank redlining and federal government housing policies preventing people of color (and often not just African Americans) from buying homes in white neighborhoods relegating them to more rundown communities where property values didn’t rise like they did on the white side of town.” In other words, because of the history of institutional racism caused by the unfair federal housing acts, most people of color are still being kept out of neighborhoods that have high appreciation rate.

Realtors also play a major role on keeping the expensive or high appreciation rate neighborhoods white. As Suzanne Gamboa reports the study’s finding of housing discrimination from The Department of Housing and Urban Development in his article,

“_Black testers wanting to rent were told about 11.4 percent fewer units and shown 4.2 percent fewer. Black testers wanting to buy a home were told about 17 percent fewer homes and shown 17.7 percent fewer homes.

_ Hispanic testers were told about 12.5 percent fewer units to rent and shown 7.5 percent fewer. There were no statistically significant differences in the number of homes shows white testers compared to Hispanic testers. Authors said, that finding reflects a long-term decline against Hispanic testers wanting to buy homes.

_ Asian testers were told about 9.8 percent fewer and told about 6.6 percent fewer rental units. They were told about 15.5 percent and shown 18.8 percent fewer homes to buy.”

The datas explain homebuyers of color receive less information and attention from most realtors than white homebuyers. According to the discrimination that people of color are more likely be poorer than whites, realtors tend to keep the more expensive houses for people of color. It means that people of color have fewer options on selecting a desirable house and a better investment choice. That causes people of color couldn’t make as much money from housing investment as whites.

In addition, people of color also have disadvantages on employment. Such as low education background globalization and technology , are the main factors of unemployment for people of color.

According to “Unemployment rate by race and Hispanic or Latino ethnicity, 2011 annual average” by U.S. Census Bureau of Labor Statistics, the unemployment rate was 7.2% for non-Hispanic whites, 14.6% for Native American, 11.5% for Hispanics or Latinos, and 15.9% for blacks. Obviously, the data shows most employees of color are more likely to be unemployed than white employees.

In America, the local public education funds mostly rely on local property taxes. It implies that when local property taxes reduce, public education funds will reduce. As California Tax Data states, “Proposition 13 replaced the practice of annually reassessing property at market value with a system based on cost at acquisition. Prior to Proposition 13, if homes in a neighborhood sold for higher prices, neighboring properties might have been reassessed based on the newly increased area values. Under Prop. 13, the property is assessed for tax purposes only when it changes ownership. As long as the property is not sold, future increases in assessed value are limited to an annual inflation factor of no more than 2%.” which means that local property taxes rate in California decreased due to Proposition 13, because property taxes rate will only increase after a completion of new construction or a change of ownership; instead of increasing the rate annually.

However, the effects on public education aren’t as well as decreasing taxes rate. Proposition 13 disrupt the distribution of local education funds. Because residents who live in poor (people of color) neighborhoods pay less property tax in term of lower housing prize, than the residents who live in rich (white) neighborhoods. It represents schools in poor neighborhoods won’t receive as much education funds as the schools in rich neighborhoods. Therefore, the policy creates education inequality gap between rich neighborhoods and poor neighborhoods.

Consequently, students who live in poor neighborhoods or students of color will receive less education opportunity and resources than students from rich neighborhoods or white students. In term of poor education quality, students of color are more likely end up with working as blue-collar laborers and have less job opportunities that help them be wealthy.

Globalization and technology are the other primacies of racial unemployment in the country. When the United States has joined the global market economy in the 70s, the economy has significantly well changed; more products were created locally and exported. In contrast, today, many of the United States’ manufacturing became overseas manufacturing.

In Derek Thompson’s analysis of globalization, “Bash Brothers: How Globalization and Technology Teamed Up to Crush Middle-Class Workers”, the effects of new globalization across the country; “significant job losses, both in manufacturing and overall. For every $1,000 increase in imports per worker, the share of people with jobs declined by 0.7 percentage points — and more for non-college grads. As manufacturing jobs declined, demand for local services would decline, and thus job losses could extend into areas like retail and hotels.” As mentioned earlier, most low-skilled workers are people of color. In other words, people of color are the biggest victims of the increasing of unemployment that caused by globalization.

Another factor that low-skilled labors loss their jobs is the development of technology. Today, many low-skilled jobs can be done by robots and machines. Due to the low cost of utilizing technology, more and more local factors substitute labors to machines. Thus, more and more people of color are losing their ways to earn money because of globalization and technology.

During the economic crush (recession) from 2007 to 2011, the racial wealth inequality has widened even more.

According the survey from Pew Research Center, the net worth of households gap of blacks and whites is about $122868 in 2005 and $107472 in 2009. The net worth of whites is about eleven times larger than blacks in 2005, but number raised to twenty times larger in 2009. In addition, the declining of net worth for each individual groups is about three times less for Hispanic medians, twice less for black median and only one percent for white medians due to the recession.

As we have seen, institutional racism of homeownership and unemployment significantly lead to income inequality; yet, the recession expand the inequality to be much larger than it had never been.  As a matter of fact, if we don’t tackle wealth gap, the issues will become much more serious; between races and classes are much bigger than just wealth inequality.

Trickle-Down Economics

By Junji Yang

The wealth gap in the U.S is one of the biggest problems in this country; we can see the homeless and poor people all around, and at the same time the U.S is one of the richest countries in the world. So what causes this big inequality between the rich and the rest of people in this country?

The thing is happening today in the America is that the top percent of the richest people are getting richer and richer while the rest of people’s wealth remains static, at best, or sometimes worsens. And surely, that causes not just a wealth gap but animosity on behalf of the increasing number of the poor people against the diminishing number of rich people. A common response from the wealthiest sectors of the economy has been: “It will help you guys too! If we have more money, we have to spend it, and that means the money will finally trickle down to your pockets and eventually give you all an opportunity to become rich.”

This idea, trickle-down economic and at first glance it seems a good way to grow the total wealth of the country. In an effort to try this theory out, congress decreased the taxes of the rich, which will ultimately make them richer. However, the results were not as predicted by the rich people said on the newspaper, media, and televisions, the rich got richer as they expected but the rest of people didn’t really become richer as they promised. One thing that was accomplished was that the wealth gap widened dramatically. As facts, we can see that from 2009 to 2011, the average net worth of the country’s 8 million wealthiest households surged from an estimated $2.7 million to $3.2 million, a Pew study said. For the 111 million households that make up the bottom 93 percent, average net worth plunged 4 percent, from $140,000 to an estimated $134,000.

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According to Barry Bluestone’s speech about the success of “The Gipper’s” trickle-down economics regarding socioeconomic inequality. “The wealthiest people spend maybe 30% of their income. Poor people spend 100%, working people spend 98%, so as we move money away from working families towards very wealthy families, we take more and more consumption out of the economy, means slower and slower growth, means higher and higher an extended unemployment.” He explains why, for the 4 million long-term unemployed, things are not looking any rosier. Inequality for those at the bottom persists, and as he explains, it is linked to high unemployment. In facts, from 1967 to 2010, the lowest group’s total increase in wealth over that entire period grows only $80,600 while the top richest people’s grows $667,700.

Again, we all got the idea of trickle-down economics that it is good for us all if a small amount of people earn a huge amount of money and the fair is that their wealth will trickle down to rest of us. However, it has become clear that it is just a myth. In reality, the trickle-down economics only goes the opposite way. The money is sucked up from us to the packets of the small amount of people. How is this happening?

Trickle-down economics isn’t really a thing in economics. It is a political label used to justify people. The idea is basically a corruption of supply-side economics, which again isn’t exactly what is called a “field” of economics, but whatever. If you are going to do any searching, I would use that phrase instead though.

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One of the “controversial” ideas is that cutting taxes will spur economic growth to the point that the government will collect more revenue even with the lower tax rate. I don’t know of any empirical evidence supporting it, though it seems theoretically plausible. The Laffer Curve deals with this, though most people use it in the context that raising taxes may lower tax revenue.

Most economists would agree that in general, assuming just a regular market in equilibrium, cutting taxes would increase growth and that growth is generally good. But one must differentiate between the idea of a permanent tax cut and a temporary tax cut. According to Milton Friedman’s Permanent Income Hypothesis, consumers will not respond very much to what they perceive as a temporary change in income, i.e., a temporary tax cut will do little to stimulate an economy because consumers expect the taxes to rise again and they’d eventually have to pay more taxes to make up for the deficit.

At some level of taxation, it’s obvious the Laffer curve is true. The debates are over what that level of taxation actually is. If you had 100% taxes on someone making $100,000 per year, you are not going to collect $100,000 per year and you may collect nothing. At any rate, if nothing else that guy is going to suddenly start getting a company car that’s a business expense, an expense account to ‘entertain clients’ that’s a business expense, perhaps even a company-supplied house, company freebies like a country club membership, vouchers for his kids to go to private school with, and so on. Suddenly his legal income will drop to way below what he was making in salary before, taxes collected from him will be considerably less than would have been collected before, while simultaneously what is ‘paid’ to him in the form of company benefits/business expenses increases. Whereas before you were taxing him at 40% and collecting maybe $30,000, his new income is going to show as $40,000 and you’ll get maybe $10,000 of that.

tax20man

So say for example taxes are a flat 30%, and we bring in 30 billion in government revenue out of our 100 billion dollar economy. If we drop taxes to 29% and there’s no growth, we’ll bring in 29 billion dollars, a net loss. To grow to where we were, the economy would need to grow an extra 3.44 % to 103.44 billion dollars. (.29 / 30) That’s just to keep up with where we were. To get a net benefit like people like Milton Friedman insist will happen, we would need even more growth than that.

That’s a HUGE change in growth. Undeveloped countries sometimes see annual change like that, but advanced economies like the U.S. typically see growth in the range of 1% to 3% or so. Intuitively, it should make sense that we’re already pretty efficient at what we do, it’s hard to get enormously better at it barring huge technological leaps. A tiny tax decrease (1% is pretty small) increasing growth by more than 3% would be astonishing and out of step with any growth we’ve ever seen even after far larger tax cuts. (The Bush tax cuts, for instance)

That’s why just about everyone except a few core believers acknowledge that lowering taxes does not increase government revenue. The growth that would be necessary for that statement to be true is so enormous that we’ve just never seen it.

Why do people keep pushing the idea even when they know it’s false? Because it lets them justify to the public tax decreases that are very popular with their very wealthy contributors, basically. Even if people who do their homework will call them on it, politicians can ignore those questions and repeat the false line about tax cuts increasing growth enough to reduce the deficit like it’s a mantra. Enough voters won’t or they are just can not realize their lying for it to be worthwhile because the media and politicians are keep telling them that this is the way that make their lives better which they would drastically support . (otherwise they wouldn’t do it all. the. time.)

sources: