Academic journal article Yale Economic Review

Determining an Income Tax System

Academic journal article Yale Economic Review

Determining an Income Tax System

Article excerpt

When the United States' national debt is hovering around $14 trillion as it is today, sources of federal funding ought to be closely examined. From where and how should the government obtain funding? Naturally, economists have been closely scrutinizing the tax system, the greatest provider of government revenues. In his working paper "Spreading the Wealth Around: Reflections Inspired by Joe the Plumber," Harvard University's N. Gregory Mankiw analyzes the tax system, utilizing several moral and philosophic guiding principles to weigh various approaches to choosing the "best system."

In arriving at the "best" taxation method, it is important to understand the reason for using moral and philosophic lenses: the income gap. Since the 1970s, the income gap has widened substantially, with total income received by the top 1% of earners doubling and that of the top 0.01% increasing by a factor of 6. Meanwhile, over the same time span, there has been virtually zero growth in income for those at the bottom of the income distribution.

The root of this burgeoning gap is an "educational slowdown," according to Claudia Goldin and Lawrence F Katz in The Race Between Education and Technology, referenced in Mankiw's study. As technology improves, the pace of educational advances (years of schooling for the cohort born in year X) has decreased by 68%, as shown by a comparison between rates obtained from 1900-1950 and 1950-1975. With technology increasing quicker than the supply of skilled workers (the pace of educational advances), the demand for skilled workers has been relatively increasing. What this translates to is a relative increase of wages to skilled labor jobs in relation to unskilled jobs, thereby causing the income gap to widen further over the years. …

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