Re: Payroll tax policy and Income inequality
Current situation
Recommendations
The United States economy is the largest economy in the world, making the country powerful and respectable. In such an economy, there should be policies that promote income equality among the people to reduce the poverty levels. The tax system of the United States will require a proper revision to incorporate equality among the different wage group categories. The recommended reforms look at ways of reducing income inequality through adjustments on the payroll tax policy.
Cuts on payroll tax and increasing the scope of the tax to encourage savings
Adjusting the payroll tax on low income employees will encourage a saving habit to the people of the US. It will be easy for the people to be able to save and build assets that will ensure that there is proper income security for them. A reduction in the payroll tax cuts will see the people from the unfortunate backgrounds save more money and create wealth for them. Adjusting the tax in terms of the range to which it reaches the people will see more needs of people catered for in the long term. For example, the tax should cover 100% health benefits of workers to ensure that they do not spend money in the hospitals. Additionally, the tax should cover pension schemes for the low income workers to help them amass wealth that can be used at the end of career lives.
Introduction of a progressive tax system
The payroll tax system of the United States does not favor the low income individuals in the country. Introduction of a progressive tax system will help redistribute wealth throughout the income brackets. Income inequality will be reduced through such a process which in the long run will help promote increased income for the government. Through a progressive tax system, the minimum wage employees will be seen to earn sufficient income to cater for their needs in the long term. Individuals will be able to save and use the savings for future investments which will further create employment opportunities and boost the economy.
Elimination of political rents
Reformation with regards to reduction of political rents will be important as it will see the tax ambiguities that help benefit the rich people closed. On the other hand, the deductions that are meant to benefit the rich need to be turned into credits to benefit the low income workers of the US. Additionally, there is a need for limiting agricultural subsidies to favor the farming community. All the recommendations to reduce political rents will help reduce the problem of income inequality in the country.
Introduction of cash benefit
Introduction of cash benefits such as contributory benefits and non-contributory benefits into the system for the people on low income will help reduce income inequality. The payroll tax system accommodates all the services such as Medicare and Medicaid for the people. Cash benefits to cover up such expenses consumed by the medical schemes and other insurance schemes will see a reduction in the amount of payroll tax cut from the low income individuals Expenses such as rent expenses and medical expenses will be taken care of through the cash benefits. Additionally, the cash benefits will also help promote a good life of the minimum wage workers after retirement through pension schemes that will see them save for a retirement benefit.
What makes the reform politically plausible?
Will the public support the reform?
Protests seen in April, 2015 where a section of New York residents protested against income inequalities in the country at the Billionaire’s Condo Building shows the dissatisfaction by the people on the current policies set. The New York City residents are most likely to vote for a change in the policies regarding payroll tax in the US. An opinion poll conducted previously showed disappointment in the raise of income inequality in the United States. The poll show that the public is likely to support the idea since it will end up benefiting them in the long term. Policy reform to reduce inequality and poverty in the US will see increased savings among employees thus promoting personal developments and investments contributing to the economy directly. A comprehensive poll survey showed that 70% of Americans would vote for reforms with regards to income inequality while 30% would vote otherwise.
Bibliography
Anderson, Patricia M., and Bruce D. Meyer. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials." Journal of Public Economics 78, no. 1 (2010): 81-106.
Chu, Mr Ke-young, Mr Hamid Reza Davoodi, and Mr Sanjeev Gupta. Income distribution and tax and government social spending policies in developing countries. No. 0-62. International Monetary Fund, 2013.
Gottschalk, Peter, and Timothy M. Smeeding. "Cross-national comparisons of earnings and income inequality." Journal of economic literature 35, no. 2 (2007): 633-687.
Liebman, Jeffrey B. "The impact of the earned income tax credit on incentives and income distribution." In Tax Policy and the Economy, Volume 12, pp. 83-120. MIT Press, 2008.
