Closing the income inequality gap is long overdue in the U.S.

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Back in October of 2014, Janet Yellen, then-chair of the U.S. Federal Reserve, delivered a speech on income inequality that raised eyebrows in central banking circles.

Expressing concern about the widening gap between the rich and poor, Ms. Yellen challenged policy makers to consider how this trend was affecting the financial well-being of most American families. Not only did she have a different way of looking at the problem than her predecessor Ben Bernanke, her perspectives were considered radically progressive for a central bank chief.

“It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority,” Ms. Yellen said during her address.

“I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.”

Fast forward to 2020 and Ms. Yellen – who left the Fed in 2018 after U.S. President Donald Trump declined to reappoint her for a second term – is considered a leading contender to become treasury secretary for the incoming Biden administration in part because of her long-time interest in solving this problem.

Income inequality refers to uneven income distribution within a country. The issue gained prominence during the U.S. election because of the twin health and economic crises sparked by the COVID-19 pandemic; renewed social awareness of systemic inequities after the police killing of George Floyd; and incendiary revelations about Mr. Trump’s tiny tax obligations.

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Income is the money that flows into households to fund daily life, such as salaries and wages. Wealth, meanwhile, reflects the value of homes, savings, investments and other holdings. Both income inequality and the related phenomenon of wealth inequality have risen in the United States since 1980.

That means over the past 40 years, the richest households have increased their share of the country’s total income. In 2019, for instance, the top 10 per cent of American adults earned 45.4 per cent of pretax national income, while the bottom 50 per cent of Americans only pocketed 13.5 per cent, according to the World Inequality Database. (The top 1 per cent, meanwhile, pulled in 18.7 per cent of America’s pretax income.)

Affluent Americans have also benefited from more substantial increases to their incomes and have accumulated more wealth over the past four decades. In contrast, lower-income earners generally spent most of what they earned from each paycheque. In fact, it’s estimated that roughly 25 per cent of Americans have no wealth at all.

These income and wealth disparities are creating social and economic strains that chafe the working poor. For instance, ordinary Americans were incensed to learn that Mr. Trump paid a paltry $750 in federal income taxes in 2016 and 2017 – the year he was elected president and his first year in the White House, respectively, according to The New York Times.

This past July, Moody’s Investors Service warned that racial, income and wealth inequality – including the “disproportionate representation of Black households in poorer income and wealth brackets” – could hurt America’s sovereign credit rating.

Still, some experts are doubtful there’ll be a wholesale reckoning on income inequality in the U.S.

“Let’s take taxation and government spending and so on. It’s so difficult to change,” Branko Milanovic, an economist and visiting presidential professor at the Graduate Center of the City University of New York, said in an interview for The Globe and Mail’s Restoring Confidence Podcast.

“The inbuilt system is so complex that you cannot really, it seems to me, change it anymore by small variations.”

As the former lead economist at the World Bank’s research department, Mr. Milanovic is a foremost expert on income inequality. If he had his druthers, the U.S. would undertake “a total tax overhaul” and start the system from scratch. Although that would be the best possible approach, he concedes that it’s wishful thinking.

That’s because many politicians are actually beneficiaries of the current tax system. It’s simply not in their interests to close all the loopholes. “So how are they going to do it?”

To Mr. Milanovic’s point, president-elect Joe Biden is promising to take incremental steps to create more tax fairness, but he has stopped short of proposing an additional “wealth tax.”

So far, Mr. Biden is vowing to raise the income tax rate for Americans earning more than US$400,000 a year. Additionally, he will change tax rules around capital gains and inheritances.

Perhaps Mr. Biden should also tweak the Fed’s mandate so that it can tackle this issue using monetary policy because income inequality hampers economic growth.

Although Ms. Yellen didn’t muse about monetary policy solutions in her 2014 speech, maybe she ought to if she becomes treasury secretary.

The U.S. may boast the world’s largest economy, but it also has the highest level of income inequality among Group of Seven countries, according to OECD data.

What does it say about the American dream if the vast majority of American families are being left behind?

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