ECN 2101 Term Paper Roman Smith
Income Inequality in the United
States: Analysis and Policy Solutions
Roman Smith
March 2, 2015
Introduction……………………………………………………………………………………………………………………..1
Current Income Distribution………………………………………………………………………………………..…….1
Fair Income Distribution……………………………………………………………………………………………………2
Recommended Policy Change…………………………………………………………………………………..….…...3
Economic Implications……………………………………………………………………………………..….….….…...4
Religious Implications…………………………………………………………………………………………..….….…..5
Conclusion………………………………………………………………………………………………………..….….……..6
Bibliography………………………………………………………………………………………………….….….….….….7
Roman Smith 1
Introduction
Income inequality in the United States has become a serious issue in the last few decades.
The upper class has continued to grow in wealth, and shows no signs of stopping. There are
several factors at play when it comes to income inequality. In this paper, we will observe one
specific cause of the uneven levels of income in the United States: the capital gains tax. We will
first examine what exactly the current levels of income inequality are, and what the ideal
distribution of income would look like. We will then go over an important policy change.
Finally, we will look at the implications of enacting this policy in both an economic and a
religious sense. I am recommending that capital gains be taxed at the income tax rate, a policy
with several merits that we will examine closely.
Current Income Distribution
The United States is one of the richest countries in the world, so it comes as no surprise
that we would have extravagant wealth in our country. The difference in wealth between the
lower and upper classes, on the other hand, is shocking. The richest 0.1% of US citizens holds
roughly 22% of the country’s wealth, which is equal to the holdings of the bottom 90% of the
country (Economist, 2014). In other words, if the United States of America had 1000 people in it,
the richest person would have roughly as much money as the bottom 900 people combined.
Income distribution this uneven is unheard of. In fact, current levels of income inequality in the
US are “probably higher than in any other society at any time in the past, anywhere in the world”
(Piketty, 2014, p8). The unfair income distribution in the United States has reached levels that
have never been seen before.
Roman Smith 2
This issue has many different causes, from social to economic to political. Even so, there
is one culprit that has contributed to current levels of income inequality more than anything else:
the capital gains tax. Back in the 1990’s, the capital gains tax rate was lowered to roughly 15%.
This meant that gains from most investments would be taxed at a lower rate than most normal
income (Ordower, 2014, p910). Specifically, anyone making over $34,500 is taxed at a higher
rate than a wealthy investor cashing in on capital gains (Mufson et al, 2011). The impact of this
has been devastating. In the last few decades, changes in income from capital gains and
dividends have been by far the largest contributor to income inequality (Hungerford, 2013, p19).
More and more, the income of the upper class is coming in the form of capital gains – over the
past 20 years, 80% of all capital gains income went to the top 5% of the United States (Mufson et
