Why is there income inequality?

by Krantcents · 19 comments

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Income inequality has grown significantly in the United States! The top 1% increased income and the middle class income has been declining at a much faster rate. Some of the factors that contribute to income inequality are geographical, globalization, race, gender, education, immigration, institutional, taxation and decline of unions. What do you think is the biggest factor in income inequality? 


As you can imagine, there are wide differences between states and major cities. In addition there are wide differences between regions, major cities and other areas of the country. Just comparing the major cities and the income disparity from New York City to Chicago or Los Angeles for the same position, you will find more income inequality. In some of the highest income cities, you will find more disparity of income.  What can you do about it?


The United States used to be a manufacturing economy, but that was a long time ago. Corporations are always looking for a low cost method for manufacturing. We can blame the corporations for outsourcing, but consumers have created demand for lower prices and globalization is the answer. Corporations outsource manufacturing to low wage countries and they can meet demand with a low priced product. Manufacturing kept wages relatively higher and created a middle class.


The recession has increased income inequality between white and non-white Americans. The recession has affected African American and Latino families much more than white families. Much of the gap is the loss in housing values and higher unemployment rates. Most wealth is in your personal residence, then retirement accounts and finally savings. All of which are materially affected in a recession particularly if you lose your job.


There has been a great deal of discussion regarding income disparity regarding men and women. Statistically, women earn approximately seventy-seven (77%) percent of what men earn. The disparity is greater when you include race too. I will not discuss the variety of reasons given for the disparity because that would be another article by itself. For the record, I feel that men and women should earn the same based on the same job description. Since no one has the exact same skills and experience, there will be differences, but the salary range should be the same for the same job.


More women are going to college and yet there is still a considerable disparity in income. Some may say it will take a generation or two for women to catch up. I think this excuse has been used for a variety of changes and it does not hold up under scrutiny. My wife and I raised our children (boy & girl) to do their best and achieve in education and the real world too. They should be able to earn based on their skills and experience. Education is one way to help men and women overcome income inequality.


As a country of immigrants, people come to this country with little wealth and find opportunities for success. This takes generations and adds to income inequality. I live in southern California and many immigrants fulfill low wage jobs. I also see immigrants who fill technical and professional jobs too. I am referring to vast majority of immigrants who start out with many of the jobs, U.S. citizens are unwilling to do.


Our universities attract some of the brightest students in the world, but our immigration policies and laws discourage these same students to immigrate to the United States. The decline of union membership has added to income inequality. Since our economy has moved from a manufacturing economy to more of a service economy, the income disparity has increased. The income disparity of CEO’s relative to the lowest paid employee is increasing. Is this institutional?


Tax policy has added to income disparity probably more than any other factor. A good example is former Governor Mitt Romney. There was a great deal of discussion when he was running for president about his income which is taxed at capital gains rates (15%). There are a lot of people including ordinary people who receive capital gains income. I do and wished I earned more! Donald Sterling (Los Angeles Clippers owner) just earned nearly two ($2) billion dollars in capital gains selling his professional basketball team.

Rich people have more to risk and therefore more they can earn at a capital gains rate. Capital gains is a profit from the sale of property or of an investment. It may be a home, income property, classic car, investment, business, stocks, bonds, mutual funds, or collectibles. The more money you earn, the more likely you will pay more taxes. That said, the more you earn, you will have more choices to avoid or defer taxes thanks to good tax advice.

Final thoughts

“The rich get richer and the poor get poorer” is a catchphrase when discussing income inequality. I tried to objectively point out many of the reasons for income inequality, although I refrained from offering solutions. Success as it is measured in wealth is not going to go away no matter what is done. Taxes have been higher and it did not stop people from becoming wealthy. There will always be income inequality, but it does not have to keep increasing. The cure for income inequality is multifold, but it begins with an emphasis on education, skills and opportunity for success.

Photo by:  Flickr

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