How to Fix Income Inequality

1. Rather than add taxes to fund more social welfare–in effect, placing a Band-Aid over the tumor–let’s start by removing the source of rising inequality: the Federal Reserve. I laid out in detail how the Fed’s policies have enriched the top .1% at the expense of everyone else in Want to Reduce Income/Wealth Inequality? Abolish the Engine of Inequality, the Federal Reserve (January 28, 2014)

This boils down to the Cantillion Effect: new money is injected into the economy at specific points, creating winners and losers. Those with access to the new money (in the Federal Reserve’s policies, those with financial power) gain immensely and everyone far from the free-money spigot loses purchasing power.

There’s no mystery here: if trillions of dollars are available at near-zero interest rates to those at the top of the pyramid, they will benefit accordingly. …

2. Eliminate the 6.2% Social Security payroll tax paid by employees and employers, and print the money to pay Social Security benefits in the Treasury. I described this solution in How About Ending Social Security and Paying Retirees with Cash? (November 15, 2013).

The basic idea is this: rather than borrow money into existence via the Federal Reserve, abolish the Fed and print the new money directly. There is no interest to be paid on this new money, and so the financial parasites have nothing to gain from its creation.

This would wipe out the most regressive tax on the working poor, and benefit all employers. Each currently pay 6.2% of wages, so eliminating Social Security taxes would give every worker an immediate 6.2% raise and every employer a 6.2% reduction in labor overhead. (The 1.45% Medicare tax each pays would remain in place.)

The newly issued $800 billion a year would flow directly into tens of millions of individuals’ accounts, where the the majority of it will be spent in the real economy. …

3. Tax unearned income at much higher rates than earned income. The vast majority of the New Nobility’s income is unearned income from rents, interest, dividends and capital gains. Taxing unearned income is in effect a wealth tax because only those who own income-producing assets have unearned income.

It would be easy to set up a simple tiered tax structure that reduces income taxes for households with less than $250,000 annual earned income and offsets that reduction by raising the tax on unearned income above some level that enables small entrepreneurs and middle-class households to accumulate capital–for example, unearned income such as interest, dividends and capital gains would be taxed at the same rate as earned income up to $100,000 and then rises to much higher rates above that level. …

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