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TheStreet Open House

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."

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