Does Estate Tax Affect the Income Inequality

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INCOME INEUQLITY

Abstract

Recently, inequality is really a huge issue that existed in the United States. The main

reason that leads to the income inequality is the wealth gap between the rich and the poor.

Once the income inequality is solved, the society will be well developed and a growth will be

seen in the economy. This paper centers on estate tax, discussing whether the estate tax can

affect the income inequality in a positive way. Although the estate tax has been controversial

for many years and many experts doubt its usefulness, it really plays a very important role in

determining the income inequality. After researching, the estate tax that imposed on rich

people can reduce the income inequality by transferring less money to the next generation so

that the nation will gather enough money to redistribute the fortune to balance the inequality.

Does Estate Tax Affect the Income Inequality in the United States?

INCOME INEUQLITY

A Review of the Literature

Recently, the Organization for Economic Cooperation and Development (2013) reported

that “the richest 10 percent in OECD countries have an average income 9.5 times than the

poorest 10 percent” (p.1). It shows that the gap between rich countries and poor countries is

enlarging. Moreover, Emmanuel Saez (2012) stated that “a majority of the income gains over

the past eighteen years has been captured by the top 1%” (p.1256). As Saez (2012) has

explained that “during the Obama economic recovery (2007-2009), 93 percent of the income

gains went to the top 1 percent of the citizens” (p.1258). The data shows that the income

inequality has become a huge issue in the United States and it is time for the American

government to take actions. One effective approach for solving income inequality is using

estate tax; however, there is still a heated debate on whether to abolish or to reform the estate

tax due to its controversial characteristic. Some groups of people consider the estate tax as a

useless tax that only can lead to the recession of the society. However, others regard the estate

tax as a positive reform in reducing the income inequality in a nation. This paper centers on

the estate tax and discusses its efficiency in affecting the income inequality. That’s to say, the

estate tax can not only balance the wealth gap between the rich and the poor through the way

of redistributing money by the government, but also give a fair chance to all so that everyone

will be at least equal in pursing their success at the beginning.

Until recently, income inequality is still a destructive problem that can imperil both the

growth of the economy and the development of the society, which in turn may lead to the

recession of the nation. According to the study, “as has been extensively chronicled

elsewhere, it is indisputable that there is a growing income and wealth inequality in the

United States.” (Caron &Repetti, 2013, p.1257). Moreover, income inequality is like a huge

menace that pushes so many burdens on both individuals and society so that it should be

taken into consideration as soon as possible whenever it exists. As Caron and Repetti (2013)

has explained that “inequality has significant adverse societal consequences and the higher

degree of a nation’s income inequality, the greater health and social problems it will arouse”

(p.1261). Consequently, those problems will lead to lower educational opportunities and less

job experiences, which may cause more students to drop out of school so that the stability of

INCOME INEUQLITY

the society will be fluctuated. That instabilities will impair people’s motivation in creating

fortune, and finally the whole nation will be in danger.

The effects of income inequality can also be explained by empirical studies. As pointed

out in Caron’s (2013) article income inequality has real bad influences on a nation’s

economic growth, and he suggests that “high concentration of wealth correlate with poor

economic performance” (p. 1266). Furthermore, income inequality can also arouse a nation’s

political instability. Thorbecke (2003) concluded that “high inequality could lead to a lower

level of democracy, high rent-seeking policies, and a higher probability of revolution”

(p.1485). That means inequality will destroy a nation’s social cohesion which will in turn be

harmful to the nation’s democracy, and thus people would pay less attention to their nation’s

construction so that the nation’s productivity would be declined.

As discussed in the previous paragraphs, income inequality is really a burning question

that needs to be solved. The most common way that experts suggest is using estate tax.