How the threat of an imminent fiscal cliff is directly related to Research Paper

How the threat of an imminent fiscal cliff is directly related to income inequality - Research Paper Example The whole problem was triggered by the quarrel over tax cuts for the wealthiest 1% percentage of Americans. It can be argued that the prospects of the future global economy depends much on the debate circling to distribution of income or equality among all sections of the society. The republicans support the tax cuts on the argument of the role played by income in the development of incentives. They argue that the role of the government is not ecstatic in managing the money of the tax payers. They put the example of the CEO who may feel the disincentive on working harder if the government levies a tax of 10% more on his income. The Republicans states the money that is paid by the tax payers can be more efficiently invested in profitable investments instead of wasting the amount in the inefficient programs of the government. Research question How the threat of an imminent fiscal cliff is directly related to income inequality? Literature Review The law makers of the country are facing three unattractive options. They can keep the policy on hold till the beginning of next year. With the implementation of the policy the spending rates are anticipated to go down and therefore the economy will again be on the verge of inflation. Again the deficit of the current balance is anticipated to fall as well. They can opt for the middle course which would address the issues of the budget to a certain extent and will also have modest impact on the rate of growth. Two dimensions can be put forwarded regarding the inefficiency of the government. The spending in the public sector cannot be identified as waste because some of the expenditures roll out to the private sector as well. In some cases the roll is large enough. Moreover some profitable investments can only be done by the government. An individual cannot be held responsible for his resources and the same individual can be held responsible for the choices he makes. It is undoubted that the policy maker will opt for the pro grams that bring equalization in the society rather than increase the taxes for the wealthiest population. The term economic inequality is used to define the gap between the rich and the poor. The disparities in distribution of the economic assets among individuals or groups of population are regarded as economic inequality (World Bank, 2005, p. 27-28). There are many causes for economic inequality and primary of them being the differences in wages and salaries of the employed. Inequality in the labor market leads to concentration of wealth in the hands of the few. Some of the other causes are racial inequality, gender inequality, tax loopholes and increasing costs of education. The distributive inefficiency gets reduced by economic inequality. Inequality acts to reduce the total personal utility. The simplest form of measuring inequality arranges the entire population from poorest to the richest and pictures the percentage of spending attributable to either quintile or decile of th e arrangement. One of the most popular measures on inequality is Gini coefficient (Cullis and Koppen, 2007, p. 2-3). It ranges from 0 showing perfect equality to 1 showing perfect inequality. It is derived from the Lorenz curve which also arranges the population from the poorest to the richest. The Lorenz curve is drawn using the cumulative proportion of the population and the cumulative expenditure on the horizontal and the vertical axis