This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Obama's 'Tax the Rich' Falls Flat With Economists

NEW YORK ( TheStreet) -- Taxing the wealthy won't fix the income inequality that President Obama has called "the defining issue of our time," according to several economists.

In fact, the best shot of bridging the widening gap between the rich and the poor is the more difficult task of revamping the U.S. education system.

" Income inequality is a structural issue needing educational reform to help compete with other countries," says Jay Ferrara, an Economic Strategist with Farmers and Merchants Trust Company.

Most economists agree with President Obama that the wealth gap has been widening in the U.S. for at least 30 years. Since 1980 mean income (the average of all American incomes) has grown 38.37% while median income (literally the pay of the average middle-income earner) has only grown 30.9%, according to data from the U.S. Census Bureau.

Adding more fuel to the fire is the fact that from 1980 to 2008, the share of total U.S. income held by the wealthiest 1% jumped from 10% to 21%, according to the U.S. Congress Joint Economic Committee (JEC).

At first glance, increasing taxes on the wealthiest Americans would seem to be a possible solution for closing the gap of median and mean income. To that end, President Obama has proposed ending Bush-era tax cuts, saying "anybody making over $250,000 a year should go back to the income tax rates we were paying under Bill Clinton."

However, history has shown that Obama's plans are no sure thing. In fact, when President Clinton passed the Deficit Reduction Act in 1993 -- pushing the top marginal tax rate from 31.0 percent to 39.6 percent -- the wealthiest 1 percent saw a 10.3 percent increase in real income, according to the JEC.

The reason for the boost is that increasing the marginal tax rate on the wealthiest Americans just increased their incentive to find sources of income with greater tax advantages, according to Martin Feldstein in his paper "What the '93 Tax Increases Really Did."

Without the ability to change the income gap through tax policy, economists argue improving wage growth and education as primary solutions to income inequality.

Merchant's Ferrara argues that over the past few decades jobs have required more advanced skills and the U.S. educational system has not properly adjusted.

First, Ferrara says that teachers unions and their evaluations need to be reformed. "Accountability and performance rather than tenure should be the primary judgment factors", he says. Apprenticeships could be another solution, giving all citizens "the ability to be tutored in certain skills or trades that would lead to a successful career."

To improve the educational system, Ferrara says the students' interests must be made a top priority in terms of funding. "The United States does not have a revenue problem at the federal level; we have a spending problem", according to Ferrara, since "vested interests have distorted the funding mechanism."

Even traditionally left leaning economists are agreeing that education is the real answer to the income gap.

Raghuram Rajan, a University of Chicago Economist, says in the The Occupy Handbook, "The central problem is that too much of the U.S. workforce is unqualified for the good knowledge-intensive jobs that are being, and will be, created by its economy."

Rajan says that now the United States' workforce is ill-prepared for the changing job market. So the United States has seen low wage growth for low and middle class workers and increased income inequality.

Rajan sees a solution for reducing income inequality through educational reform and higher wage growth, stating "we need to think creatively about how Americans can acquire the skills they need to enhance their incomes." The United States needs to work on improving primary and secondary schools to help more Americans go to college and earn more degrees, especially in science, technology, engineering and mathematics."

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,959.44 +154.64 0.87%
S&P 500 2,078.54 +7.89 0.38%
NASDAQ 4,781.4240 +16.0440 0.34%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs