Richest Americans take a bigger slice of economic pie

The United States (US) wealth divide has widened even further during the current COVID-19 pandemic, as the top one per cent of households added US$4 trillion in net worth.

This has resulted in the richest Americans taking a bigger slice of the economic pie. President Joe Biden has sought to address this widening income disparity by narrowing income and wealth gaps from almost US$4 trillion in spending plans to the biggest tax increase in a generation.

Narrowing the income gap underpins Biden’s economic programme but even these measures may struggle to make headway against the highest levels of inequality in the developed world. The American president has outlined plans to create well-paid jobs with infrastructure investments, expand child care and bolster the social safety net.

Higher taxes on corporations and wealthy households will cover part of the budget bill that Biden will place before Congress for approval. In addition to these measures, Biden has also promised to boost minimum wages, broaden union rights and fight racial injustice in the economy.

Reversing decade old trends

The Biden administration is seeking to reverse trends that have become entrenched over decades, causing America’s income disparity to be growing. To address this, Biden proposes to raise the top income-tax rate to 39.6 per cent, citing loopholes that “reward wealth over work”.

This will result in an almost doubling of the rate on capital gains for those making more than US$1 million and eliminate a method used by private-equity investors to lower their bills. A change to the way inherited assets are taxed may raise charges on the richest estates.

Already, there are question marks over how effective the plan will be in the short-term. However, the ultra-wealthy are already racing to transfer assets to heirs to avoid any hit.

Biden abandoned a proposed change to the estate tax, which allows up to US$11.7 million to be transferred upon death before a 40 per cent levy kicks in. He proposes to raise the charge on corporate profits to 28 per cent, reversing half of his predecessor, Donald Trump’s 2017 tax cut, and his administration is seeking international accord on a minimum tax for big global companies.

The contribution of business to the total US tax take has been steadily declining.  According to Bloomberg, the figure was 7.6 per cent in 2018, the lowest since at least 1960.

Biden’s investment plans

Biden says his investment plans will create union jobs, which typically pay significantly more and have better benefits. The American President is also proposing to boost wages for child-care staff and federal contractors to at least US$15 an hour, though he’s had to shelve plans to raise the national minimum wage to the same level.

Family measures including a child-care tax credit may help restore women to the labor force. Some 2.3 million dropped out during the pandemic and the steepest decline was among women with two children.