Thursday, August 11, 2011

Everything you need to know about Income Inequality in America

As Congress (prematurely) shifts its focus away from ending the Great Recession to dealing with our long term debt crisis, a basic question emerges. Who should bear the burden of the tough choices that will be necessary (even if they are not wise in the short term) to reduce our deficits and our future debt? Republican plans would put the burden on the poor and middle class, although they hope you don’t notice. Democratic plans purport shared sacrifice where all income groups share in the pain. I am going to declare something that would get me branded as a Socialist in DC. The rich should bear a large portion of the sacrifice involved in dealing with our debt crisis.

The current income inequality in the United States is amazing in its size, as well as its relation to other developed countries and to what it has been in our past. The following information is all that an analytical liberal needs to win an argument on trickle-down economics.

I do not wish to demonize the rich; they have done and continue to create amazing new products, jobs, and industries for our country. They have also done amazing charitable work (see Bill and Malinda Gates). I simply think they should pay more in taxes.   

A Note on Terminology

Before we begin, I think I should explain a term that is used quite frequently throughout this article. A Percentile refers to dividing a population into 100 equal groups of people based on some criteria. For example, the term 10th income percentile refers to the 10th lowest percent of income earners. In essence the term percentile shows that it is a percentage of the population that is being talked about rather than a percentage of the quantity being compared (income, wealth, income growth, etc.)

There is a difference between the rich and the super-rich

If you look at the lower income marker of Percentiles it shows that there is a relatively steady climb up the income ladder until around the 95th  percentile. Then the difference between each percentile is enormous. This can be most clearly seen on a graph of 2010 income data at the Economix blog at the New York Times website.

I also find this data useful to understand what the income structure of the United States looks like in general. For instance where would an income of $100,000 a year place a person compared to the rest of the country? The following data is from the Tax Policy Center, a joint project between the Urban Institute and the Brookings Institution. These numbers show the (yearly pre-tax) income breaks for all tax filers (aka families) for 2011. They might not match up to the numbers in other sections of this article because economists use different definitions for income and different years for their calculations.

Percentile                                         Lower Income break

10                                                       $9,235
20                                                       $16,358
30                                                       $23,873
40                                                       $32,188
50                                                       $42,327
60                                                       $57,213
70                                                       $73,886
80                                                       $97,298
90                                                       $154,131

95                                                       $200,026
96                                                       $235,687
97                                                       $290,860
98                                                       $360,435
99                                                       $506,553
99.5                                                   $815,868
99.9                                                   $2,070,574

Income is heavily concentrated at the top

The Federal Reserve did an investigation into the distribution of pre-tax income in 2009.  These numbers represent the percent of all income that was earned by different income groups in 2007. These numbers come from the income row of table A5a.

Income group                                 Percent of all income
Top 1%                                          21.4%
95-99 Percentile                             15.8%
90-95 Percentile                             10.0%
50-90 Percentile                             38.2%
Bottom 50%                                   14.6%

These numbers point out what Bernie Sanders said and Politifact confirmed: The top one percent of earns more income than the bottom 50 percent combined.

The top 10 percent earn 47.2%, nearly half, of all income.

Wealth is even more heavily concentrated at the top

The rich have the ability and the willingness to save more than the rest of us. Many of the poor have a negative net worth due to debt, so that also increases the inequality between the rich and the poor. The following numbers come from the same Federal Reserve study and are found in Table 4. They show the percent of post-tax wealth in the country held by net worth percentile groups.

Wealth Group                     Percent of all wealth
Top 1%                               33.8%
95-99 Percentile                 26.6%
90-95 Percentile                 11.1%
50-90 Percentile                 26.0%
Bottom 50%                        2.5%

Wealth is so heavily concentrated at the top that Michael Moore was able to correctly claim that the wealthiest 400 individuals have more wealth than the bottom half of the country combined (Politifact).

The top 10 percent own 71.5% of the country’s wealth. The top 1 percent owns more wealth than the bottom 90 percent.

Since 1979 higher income groups have seen the largest gains in income

The Center on Budget and Policy Priorities (CBPP), a liberal organization that focuses on fiscal policy, calculated the average percent growth in after-tax income for income groups from 1979 through 2007 (before the Great Recession). These numbers are based on Congressional Budget Office data.

Income group                                 Percent growth 1979-2007

Lowest fifth                                      16%
Second fifth                                     23%
Middle fifth                                      25%
Fourth fifth                                      35%
Top fifth                                          95%
Top 1 Percent                                  261%

The higher the income group, the higher the gains in income. And the super rich saw a phenomenal growth in income.

In the past, income growth was much more uniform (and greater for lower income groups than it is today)

The liberal group United for a Fair Economy reverse engineered (don’t ask me how) Census data to show income growth for various income groups from 1947-1979. Politifact did the calculations and came up with results only a few percent different than theirs. I should point out that this time frame is 4 years longer than the previous data set.

Income Group                                 Percent growth 1947-1979

Bottom fifth                                     118%
Second fifth                                     100%
Middle fifth                                      111%
Fourth fifth                                      114%
Top fifth                                           99%
Top 5 percent                                  86%

Why the stark difference between these two growth patterns? My guess is that the first set reflects the results of the Bush and Regan tax cuts for the rich. I don’t know why the income growth patterns for the poor and middle class were so much larger in the second set.

Income Inequality in 2007 was the greatest it had been since the 1920s

2007 is a better gage of our long term income inequality than it using data from today because the Great Recession caused a (hopefully) temporary reduction in income across the board, but likely affected different income groups differently at different times during the Recession. So the numbers for 2007 are more indicative of the long term trend.

Politifact confirmed that income inequality in 2007 was the greatest it had been since the 1920s based on the analysis of the economists Thomas Piketty and Emmanuel Saez.

This information provides a rather convincing circumstantial case that high levels of income inequality leads to market volatility and financial crashes. The theory is that when the rich have a lot of money, they spend it in ways that create bubbles (stocks, housing, ect.) which are billed at the time as the safest investment imaginable, but ultimately end up crashing the economy.

The United States has one of the highest degrees of income inequality in the developed world

The Gini Index is a statistic (which I do not fully understand) that measures a country’s income inequality. The larger a country’s Gini Index, on a scale from 0 to 100, the greater the income inequality. The CIA World Factbook compiled a list of 136 countries and ranked them based on their Gini Index. [I have been having some problems with the CIA World Factbook link, so here is the URL:]

The UN maintains a list of developed countries based on the Human Development Index. That list includes 42 countries (Wikipedia). Of the countries on their list only Hong Kong and Singapore, small island nations just off the coast of Asia, have a greater Gini Index than the United States. All other developed countries in the CIA World Factbook list have a smaller degree of income inequality than the US. What follows is a selective list of developed countries and their Gini Index.

Country                                             Gini Index
Hong Kong                                       53.3
Singapore                                         47.8
United States                                   45.0
Israel                                                  39.2
Portugal                                            38.5
Japan                                                 37.6
New Zealand                                   36.2
Poland                                               34.9
United Kingdom                             34.0
Switzerland                                      33.7
Greece                                               33.0
France                                               32.7
Canada                                              32.1
Italy                                                    32.0
Spain                                                  32.0
South Korea                                     31.4
Netherlands                                     30.9
Australia                                           30.5
Ireland                                               29.3
Denmark                                          29.0
Belgium                                             28.0
Iceland                                              28.0
Germany                                          27.0
Finland                                              26.8
Austria                                               26.0
Czech Republic                                26.0
Norway                                             25.0
Sweden                                             23.0

Lower income groups have higher rates of unemployment

Researchers from Northeastern University’s Center for Labor Market Studies found that the less someone makes, the more likely they are to be unemployed. This trend is true during times of economic growth as well as during economic downturns. The numbers also show that the poor are bearing the overwhelming brunt of the recession. The middle class has been hit hard, but not quite as bad as the poor. The rich have a labor market that isn’t in recession at all. The report’s authors conclude,

What has been missing from the public debate over the labor market crisis is an honest and detailed analysis of which American workers have been most adversely affected by the deep deterioration in labor markets.

All of my information, including the table below, comes from a blog post at the Time Magazine website.

Income decile   Unemployment 4th Q 2007  Unemployment 4th Q 2009

$12,160 or less                           18.4%                                                  30.8%
$12,160-$20,725                        10.7%                                                  19.1%
$20,725-$29,680                        7.5%                                                    15.3%
$29,680-$39,000                        5.6%                                                    12.2%
$39,000-$50,000                        4.0%                                                    9.0%
$50,000-$63,000                        3.7%                                                    7.8%
$63,000-$79,100                        3.3%                                                    6.4%
$79,100-$100,500                      2.4%                                                    5.0%
$100,500-$138,700                    2.0%                                                    4.0%
$138,700 +                                 1.6%                                                    3.2%

The US tax code is only barely progressive

The organization Citizens for Tax Justice did an analysis of our country’s tax system by comparing the percent of income earned by various income groups to the percent of taxes that they pay. The results show that sales taxes and the Social Security payroll tax, both of which are regressive, almost completely counteract the progressivity of income taxes. They also computed real tax rate for various income groups, the percent of a person’s income that is taken up by taxes. All that ever seems to get talked about in tax discussions are marginal taxes, taxes on the highest portion of someone’s income. Marginal tax rates are always higher than real tax rates. This focus on marginal rates obscures how much people actually pay in taxes. These numbers are for 2009.The link for Citizens for Tax Justice has a couple graphs that show these numbers quite nicely, I would suggest you take a look at it.

Income Group     Share of total income     Share of total taxes   Taxes as a % of income
Lowest 20%                 3.5%                                      1.9%                             16.0%
Second 20%                 7.1%                                      5.0%                             20.5%
Middle 20%                 11.6%                                    10.2%                            25.3%
Fourth 20%                  18.9%                                    18.9%                           28.5%
Next 10%                      14.3%                                    15.2%                           30.2%
Next 5%                        10.2%                                    11.2%                           31.2%
Next 4%                        14.2%                                    15.8%                           31.6%
Top 1%                          20.4%                                    22.1%                           30.8%

The Overwhelming Majority of Americans support raising taxes on the wealthy

With republican legislators unwilling to consider any new revenue in deficit reduction plans, you might think that there are no changes to the tax code which the vast majority of Americans would support. But what is going on in Congress right now does not reflect public opinion. In poll after poll, an overwhelming majority of the public favor raising taxes on those who make over $250,000 a year. The following polls come verbatim from a Politifact article. [Emphasis added]

"In order to reduce the national debt, would you support or oppose raising taxes on Americans with incomes over 250 thousand dollars a year?" Support: 72 percent. Oppose: 27 percent. Unsure: 1 percent. (ABC News/Washington Post Poll. April 14-17, 2011)

"Do you support or oppose doing each of the following to deal with the federal budget deficit? … Increase taxes on income over $250,000." Support: 64 percent. Oppose: 33 percent. Unsure: 3 percent. (
McClatchy-Marist Poll. April 10-14, 2011.)

"Now looking ahead to next year's federal budget, do you think it should or should not include higher taxes for families with household incomes of $250,000 and above?" Should: 59 percent. Should not: 37 percent. Unsure: 4 percent. (
USA Today/Gallup Poll. April 11, 2011.)


By various markers, income growth, market volatility, public opinion, the country would be better off with a smaller degree of income inequality. The level of income inequality in the United States is astonishing in and of itself, but also in comparison to other countries and our country’s past. As we ask ourselves who will bear the burden of deficit reduction, keep these figures in mind.

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