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The Widening Wage Gap

Aug 29, 2018 | Joseph Sherman |

The Widening Wage Gap

The U.S. Census Bureau recently released numbers that document the increasing inequality in the US. In this article, we will go beyond the numbers and explain why the rich are getting richer and the poor are getting poorer. One thing is for certain, the wage gap is continuously expanding and this has historically not ended well.

Technology isn’t a blessing for everyone

According to a March 2012 report from the nonpartisan Congressional Research Service, the technology that plays a big role in our daily life also has a significant impact on employment.

Technology is taking over some of the jobs previously performed by low-skill workers. At the same time, it is allowing more companies to send jobs to countries with lower wages. The diminishing supply of low-skill jobs means greater competition for those jobs, which has led to lower wages.

However, some professions see their wages increase due to technology. It “serves as a complement to high-skilled workers, which has raised demand for and the relative wages of these workers,” the report says.

Tax cut for the rich

A separate recently released analysis by the Congressional Research Service points out that, for the past 60 years, the average federal income tax rate has been dropping steadily for the highest-income taxpayers. For instance, during the Bush presidency, the top marginal tax rate was lowered from 36.9 percent to 35 percent. These rates were significantly lowered in the recent tax cuts.

The report states that such tax cuts mean the wealthiest get wealthier, thus increasing inequality. The report also suggests that lower tax rates may act as an incentive for top earners to negotiate even higher pay because a lower tax rate means they’d get to keep more of each additional dollar.

The report concludes that “the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”

Capital gains

Not only did the Bush tax cuts decrease the top marginal tax rate, they also lowered taxes on capital gains. The tax rate for capital gains dropped from 28 percent to 20 percent in the 1990s and has since dropped to just 15 percent.

Top earners are also making a higher percentage of their income from capital gains. The top 1 percent made 36 percent of their income from capital gains in 2016, which is up from 31 percent two decades earlier.

In other words, when you combine higher capital gains with lower tax rates, the wealthy increase their earnings faster than people at the other end of the scale.

Shifting social norms

Some economics experts say that another factor behind the increasing wage gap is the shifting social norms. As a whole, society is less horrified by skyrocketing salaries than we used to be.

According to New York Times’ Paul Krugman, the general mindset of Americans after the New Deal and WWII tended towards equal pay and humbler and community-oriented executives, but this has since changed, creating greater acceptance of the huge compensation executives receive today.