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Income inequality in the United States is the extent to which income is distributed in an uneven manner among the American population. Inequality increased significantly following the 1960s after decades of stability. Inequality increased measured by market income (excluding taxes and transfer payments) and by income after those adjustments. Income inequality has fluctuated since measurements began around 1915, declining until the 1950s, followed by a 30-year period of relative stability and increasing thereafter. Recasting 2012's national income using the 1979 income distribution, the bottom 99% of families would have averaged about $7,100 more income.
Measured for all households, US inequality is comparable to other developed countries before taxes and transfers, but is among the highest after taxes and transfers, meaning the US redistributes relatively less income than those countries. Measured for working-age households, market income inequality is comparatively high (rather than moderate) and the level of redistribution is moderate (not low). These comparisons indicate American's shift from market income to income transfers later in life.
US federal tax and transfer policies are progressive and therefore reduce effective income inequality. Tax and transfer policies together reduced income inequality slightly more in 2011 than in 1979.
While strong evidence indicates that inequality has increased since the 1970s, debate revolves around appropriate measurement, causes, effects and solutions. Measurement is particularly debated, as inequality measures vary to a significant extent, for example, across datasets or whether in-kind compensation is considered, such as employer-paid healthcare, whose costs increased dramatically during the period.
The two major political parties approach the issue differently, with Democrats that high market income-based inequality requires additional redistribution, emphasizing that economic growth should result in shared prosperity (i.e., a pro-labor argument advocating broad-based income redistribution). Republicans tend to emphasize (less unequal) consumption rather than income, using charity and designing government programs to encourage work (such as the Earned Income Tax Credit). They note that income inequality after taxes and transfers is much less unequal.
Post-Great Recession pre-tax income inequality is as high as it was during the Roaring Twenties. In 2018, income inequality was at the highest level ever recorded by the Census Bureau, with a Gini coefficient of 0.485.
- 1 Overview
- 2 History
- 3 Other indicators of inequality
- 4 Causes
- 5 Economic effects
- 6 Effects
- 6.1 Socio-economic mobility
- 6.2 Democracy and society
- 7 Public attitudes
- 8 States and cities
- 9 International comparisons
- 10 Policy responses
- 11 Measurement
- 12 Wealth inequality
- 13 See also
- 14 References
- 15 Further reading
- 16 External links
U.S. income inequality has grown significantly since the early 1970s, after several decades of stability, and has been the subject of study of many scholars and institutions. The U.S. consistently exhibits higher rates of income inequality than most developed nations due to the nation's enhanced support of free market capitalism and less progressive spending on social services.
The top 1% of households received approximately 20% of the pre-tax income in 2013, versus approximately 10% from 1950 to 1980. The top 1% is not homogeneous, with the very top income households pulling away from others in the top 1%. For example, the top 0.1% of households received approximately 10% of the pre-tax income in 2013, versus approximately 3–4% between 1951–1981. According to IRS data, adjusted gross income (AGI) of approximately $430,000 was required to be in the top 1% in 2013.
Most of the growth in income inequality has been between the middle class and top earners, with the disparity widening the further one goes up in the income distribution. The bottom 50% earned 20% of the nation's pre-tax income in 1979; this fell steadily to 14% by 2007 and 13% by 2014. Income for the middle 40% group, a proxy for the middle class, fell from 45% in 1979 to 41% in both 2007 and 2014.
To put this change into perspective, if the additional pre-tax income received by the top 1% in 2012 were redistributed to achieve the more egalitarian 1979 income distribution, these funds would be sufficient to give $11,000 more to each family in the bottom 80% ($916/month). Alternatively, this figure would be $7,100 if the funds were redistributed to the bottom 99% of families ($600/month).
The trend of rising income inequality is also apparent after taxes and transfers. A 2018 study by the Congressional Budget Office (CBO) found that the top earning 1 percent of households increased their income by 242% after federal taxes and income transfers over a period between 1979 and 2015, compared to a gain of 46% for the 60 percent in the middle of America's income distribution, and a gain of 79% for the lowest 20%. U.S. federal tax and transfer policies are progressive and therefore substantially reduce income inequality measured after taxes and transfers. They became moderately less progressive between 1979 and 2007 but slightly more progressive measured between 1979 and 2011. Income transfers had a greater impact on reducing inequality than taxes from 1979 to 2011.
CBO reported in November 2018 that all income groups significantly increased both their pre-tax and after-tax income from 1979 to 2015 in real terms (i.e., adjusted for inflation). For example, income after transfers and taxes was up 103% for the highest income quintile, 79% for the lowest income quintile, and 46% for the middle three quintiles measured together (21st to 80th percentiles). CBO also reported that the middle quintile (40th to 60th percentile) households, a proxy for the middle-class, earned an average of $58,500 in market income during 2015, representing a 12% share of the total market income. At the 1979 share of 16%, this figure would be $78,000 or $19,500 higher. After taxes and transfers, these middle-class households earned an average of $64,700, a 15% share. At the 1979 share of 16%, this figure would be $69,000 or $4,300 higher.
Americans are not generally aware of the extent of inequality or recent trends. There is a direct relationship between actual income inequality and the public's views about the need to address the issue in most developed countries, but not in the U.S., where income inequality is larger but the concern is lower. The U.S. was ranked the 6th from the last among 173 countries (4th percentile) on income equality measured by the Gini index.
There is significant and ongoing debate as to the causes, economic effects, and solutions regarding income inequality. While before-tax income inequality is subject to market factors (e.g., globalization, trade policy, labor policy, and international competition), after-tax income inequality can be directly affected by tax and transfer policy. U.S. income inequality is comparable to other developed nations before taxes and transfers, but is among the worst after taxes and transfers. Income inequality may contribute to slower economic growth, reduced income mobility, higher levels of household debt, and greater risk of financial crises and deflation.
Labor (workers) and capital (owners) have always battled over the share of the economic pie each obtains. The influence of the labor movement has waned in the U.S. since the 1960s along with union participation and more pro-capital laws. The share of total worker compensation has declined from 58% of national income (GDP) in 1970 to nearly 53% in 2013, contributing to income inequality. This has led to concerns that the economy has shifted too far in favor of capital, via a form of corporatism, corpocracy or neoliberalism.
Although some have spoken out in favor of moderate inequality as a form of incentive, others have warned against the current high levels of inequality, including Yale Nobel prize for economics winner Robert J. Shiller, (who called rising economic inequality "the most important problem that we are facing now today"), former Federal Reserve Board chairman Alan Greenspan, ("This is not the type of thing which a democratic society ��� a capitalist democratic society – can really accept without addressing"), and President Barack Obama (who referred to the widening income gap as the "defining challenge of our time").
Post-civil war era to around 1937
The first measured era lasted roughly from the post-civil war era or "the Gilded Age" to sometime around 1937. In 1915, an era in which the Rockefellers and Carnegies dominated American industry, the richest 1% of Americans earned roughly 18% of all income.
The Great Compression, 1937–1967
From about 1937 to 1947, a period dubbed as the "Great Compression" – income inequality in the United States fell dramatically. Progressive New Deal taxation, stronger unions, and regulation by the National War Labor Board during World War II broadly raised incomes and lowered the (after-tax) incomes of top earners.: 47–52
Ebbing in the early 1970s, this "middle class society" remained fairly steady. It was the product of relatively high wages for trade union workers, lack of foreign manufacturing competition and political support for redistributive government policies. By 1947 more than a third of non-farm workers were union members.: 49 Unions both raised average wages for their membership, and indirectly, and to a lesser extent, raised wages for non-union workers in similar occupations.:51 Economist Paul Krugman claimed that political support for equalizing government policies was provided by high voter turnout from union voting drives, the support of the otherwise conservative South for the New Deal, and prestige that the massive mobilization and victory of World War II had given the government.: 52, 64, 66
Alternatively, Marxist George Novacks wrote, "While the American worker enjoys the highest standard of living of any worker in the world, he is also the most heavily exploited. This tremendously productive working class gets back for its own consumption a smaller part of its output and hands over in the form of profit to the capitalist owners of the instruments of production a greater part of its output than does either the English or the French working class."
The return to high inequality, or to what Krugman and journalist Timothy Noah referred as the "Great Divergence", began in the 1970s. Inequality rose almost continuously, except during the economic recessions in 1990–91, 2001 and 2007.
The Great Divergence differs from the pre-Depression era. Before 1937, a larger share of top earners income came from capital (interest, dividends, income from rent, capital gains). After 1970, it came from labor: employment compensation.:xi
Until 2011, the Great Divergence had not been a major political issue in America, but middle-class stagnation was. In 2009 the Middle Class Working Families Task Force convened to focus on economic issues specifically affecting middle-income Americans. In 2011, the Occupy movement drew considerable attention to income inequality.
The Congressional Budget Office (CBO) reported that for the 1979-2007 period, after-tax income of households in the top 1 percent of earners grew by 275%, compared to 65% for the next 19%, just under 40% for the next 60% and 18% for the bottom fifth. "As a result of that uneven income growth," the report noted, "the share of total after-tax income received by the 1 percent of the population in households with the highest income more than doubled between 1979 and 2007, whereas the share received by low- and middle-income households declined. ... The share of income received by the top 1 percent grew from about 8% in 1979 to over 17% in 2007. The share received by the other 19 percent of households in the highest income quintile (one fifth of the population as divided by income) was fairly flat over the same period, edging up from 35% to 36%."
CBO found that the major cause was an increase in market income (income before taxes and transfers). Market income for a household is a combination of labor income (such as cash wages, employer-paid benefits, and employer-paid payroll taxes), business income (such as income from businesses and farms operated by their owners), capital gains (profits realized from the sale of assets and stock options), capital income (such as interest from bank accounts, loans, dividends, and rental income), and other income. Of these, capital gains accounted for 80% of the increase in market income for the households in the top 20% (2000–2007). Over the 1991–2000 period capital gains accounted for 45% of market income for the top 20%.:ix–x, ii–iii, 10–12
In a 2015 op-ed, Martin Feldstein, Professor of Economics at Harvard University, stated that the CBO found that from 1980 to 2010 real median household income rose by 15%. However, when the definition of income was expanded to include benefits and taxes, the CBO found that median income rose by 45%. Adjusting for (declining) household size, the gain increased to 53%.
CBO reported that less progressive tax and transfer policies contributed to an increase in after-tax income inequality between 1979 and 2007.
The Great Recession took place from 2008–2009. From 2007-2010 total income going to the bottom 99 percent of Americans declined by 11.6%, but fell by 36.3% for the top 1%. Declines were especially steep for capital gains, which fell by 75% in real terms between 2007 and 2009. Interest income fell by 40% and dividend income by 33%. Wages, the largest source of income, fell by only 6%.
In 2012, investor Warren Buffett advocated higher minimum effective income tax rates on the wealthy, considering all forms of income. He argued that in 1992, the tax paid by the 400 highest incomes in the United States averaged 26.4% of adjusted gross income. In 2009, the rate was 19.9%.
Policies enacted under President Obama increased tax rates on higher incomes, via the American Taxpayer Relief Act of 2012 and the Affordable Care Act. These changes were estimated to add $600 billion to revenue over 10 years, while not affecting the tax burden on everyone else. This reversed a long-term trend of lower tax rates for upper income persons. CBO estimated that the average tax rate for the top 1% rose from 28.1% in 2008 to 33.6% in 2013.
These changes were reversed by President Trump's tax reforms. According to economists Saez and Gabriel Zucman, in 2018 the effective total tax rate (including state and local taxes, and government fees) for the bottom 50% of U.S. households was 24.2%, whereas for the wealthiest 400 households it was 23%.
Pre-tax real income
The share received by the top 1% fell from 18.7% in 2007 to 16.0% in 2008 and 13.4% in 2009, while the bottom four quintiles all increased their share from 2007 to 2009. The share of aftertax income received by the top 1% income group fell from 16.7% to 11.5%.
The income distribution became more unequal during the economic recovery as the effects of the recession reversed. CBO reported in November 2014 that the 1%'s share had risen from 13.3% in 2009 to 14.6% in 2011.
By 2012 the income share of the top 1% had returned to its pre-crisis peak, at around 23%. based primarily on Internal Revenue Service (IRS) data. CBO uses both IRS and census data and reports a lower figure. The two series were approximately 5 percentage points apart in 2011 (Saez at about 19.7% versus CBO at 14.6%), which would imply a CBO figure of about 18% in 2012 if that relationship holds, a significant increase versus CBO's 14.6% for 2011. The 1%'s after-tax share rose from 11.5% in 2009 to 12.6% in 2011.
Between 2010 and 2013 income for the bottom 90% fell, with middle income groups dropping the most, 6% (40th-60th percentiles) or 7% (20th-40th). The top decile rose 2%.
From 2009-2012 the top 1% captured 91% of growth per family, growing 34.7% while those of the bottom 99% grew 0.8%. Measured from 2009–2015, the top 1% captured 52%. By 2015, the top 10% (top decile) had a 50.5% share, close to its highest level all-time.
In 2013 tax increases on higher income earners were implemented with the Affordable Care Act and American Taxpayer Relief Act of 2012. CBO estimated that "average federal tax rates under 2013 law would be higher – relative to tax rates in 2011 – across the income spectrum. The estimated rates under 2013 law would still be well below the average rates from 1979 through 2011 for the bottom four income quintiles, slightly below the average rate over that period for households in the 81st through 99th percentiles, and well above the average rate over that period for households in the top 1 percent of the income distribution." In 2016 Peter H. Lindert and Jeffrey G. Williamson contended that inequality was the highest in US history.
Thomas Piketty attributed the victory of Donald Trump in the 2016 presidential election, which he characterizes as an "electoral upset," to "the explosion in economic and geographic inequality in the United States over several decades and the inability of successive governments to deal with this."
In May 2017, new data sets from Piketty, Saez, and Gabriel Zucman demonstrated that inequality runs much deeper than previous data indicated. Income shares for those in the bottom half stagnated and declined during the years 1980 to 2014 from 20% in 1980 to 12% in 2014. By contrast, the top 1% share grew from 12% in 1980 to 20% in 2014. The top 1% then made on average 81 times more than the bottom 50%, while in 1981 they made 27 times more. Income for the top 0.001% surged 636% from 1980 to 2014. They noted that inequality growth during the 1970s to the 1990s could be attributed to wage growth among top earners, but that the widening gap had been a "capital-driven phenomenon since the late 1990s." They stated that "the working rich are either turning into or being replaced by rentiers."
A 2017 report by Philip Alston, the United Nations special rapporteur on extreme poverty and human rights, asserted that Donald Trump and the Republican Congress are pushing policies that would make the United States the "world champion of extreme inequality".
Other indicators of inequality
Income may not be the best indicator of equality/inequality in a society.
Conservatives and libertarians such as economist Thomas Sowell, and former Congressman and Speaker of the House Paul Ryan (R., Wisc.) argued that more important than the level of equality of results is equality of opportunity. This measures the degree to which individuals have the chance to succeed,
Conservative researchers argued that income is less important than consumption. Two individuals (or other units) who consume the same amount have similar outcomes (and/or effect on others' potential consumption) despite differences in their incomes. Consumption inequality is also less extreme. Will Wilkinson wrote, "the weight of the evidence shows that the run-up in consumption inequality has been considerably less dramatic than the rise in income inequality". According to Johnson, Smeeding and Tory, consumption inequality was lower in 2001 than it was in 1986. The debate was summarized by journalist Thomas Edsall. Other studies have not found consumption inequality less dramatic than household income inequality. A CBO study found consumption data not capturing consumption by high-income households as well as it does their incomes, though it found that household consumption numbers are less unequal than household income.:5
Others dispute the importance of consumption, pointing out that if middle and lower incomes are consuming more than they earn it is because they are saving less or going deeper into debt. Alternatively, higher income incomes may be consuming less than their income, saving/investing the balance.
According to CBO and others, "the precise reasons for the [recent] rapid growth in income at the top are not well understood",:xi but "in all likelihood," an "interaction of multiple factors" was involved. "Researchers offered several potentially conflicting rationales.":xi They include:
- decline of labor unions – Research using the broadest methodology estimated that the decline of unions may account for one-third to more than one-half of the rise of inequality among men. As unions weakened, the vast majority of productivity gains went to senior executives, shareholders and creditors (e.g. bondholders, banks and other lenders, etc.). As unions weakened, pressure on employers to increase wages and on lawmakers to enact labor-friendly or worker-friendly measures weakened.
- globalization – Low skilled American workers lost ground in the face of competition from low-wage workers in Asia and other "emerging" economies.
- skill-biased technological change – Rapid progress in information technology increased the demand for skilled and educated workers that favored brains rather than brawn.
- superstars – Modern communication technologies often turn competition into a tournament in which the winner is richly rewarded, while the runners-up get far less.
- financialization – In the 1990s stock market capitalization rose from 55% to 155% of Gross Domestic Product (GDP). Corporations began to shift executive compensation toward stock options, increasing incentives for managers to make decisions to increase share prices. Average annual CEO options increased from $500,000 to over $3 million. Stocks comprised almost 50% of CEO compensation. Managers were incentivized to increase shareholder wealth rather than to improve long-term contracts with workers; between 2000 and 2007, nearly 75% of increased stock growth came at the cost of labor wages and salaries.
- immigration of less-educated workers – relatively high levels of immigration of low skilled workers since 1965 may have reduced wages for American-born high school dropouts;
- college premium - workers with college degrees traditionally earned more and faced a lower unemployment rate than others. This explains some of the gap between the two groups (but not the 1%).
- automation - The Bureau of Labor Statistics (BLS) found that labor's income share declined due to increased automation that has been "leading to an overall drop in the need for labor input. This would cause capital share to increase, relative to labor share, as machines replace some workers."
- policy, politics and race – Krugman asserted that movement conservatives increased their influence over the Republican Party beginning in the 1970s, moving it politically rightward. Combined, he said, with the party's expanded political power, this resulted in more regressive tax laws, anti-labor policies, and further limited expansion of the welfare state relative to other developed nations (e.g., the unique absence of universal healthcare). Further, variation in income inequality across developed countries indicate that policy has a significant influence on inequality; Japan, Sweden and France have income inequality around 1960 levels.
- drug use, particularly opioids, was cited by the Federal Reserve as one cause of the decline in the labor force participation rate, which was relatively more common among lower income workers.
Higher income households are disproportionately likely to prosper when economic times are good, and to suffer losses during downturns. More of their income comes from relatively volatile capital income. For example, in 2011 the top 1% of income earners derived 37% of their income from labor, versus 62% for the middle quintile. The top 1% derived 58% of their income from capital as opposed to 4% for the middle quintile. Government transfers represented only 1% of the income of the top 1% but 25% for the middle quintile; the dollar amounts of these transfers tend to rise in recessions.
According to a 2018 report by the Organization of Economic Cooperation and Development (OECD), the US has higher income inequality and a larger percentage of low income workers than almost any other advanced nation because unemployed and at-risk workers get less support from the government and a weak collective bargaining system.
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Debate continues as to the economic effects of income inequality. For example, Alan B. Krueger summarized the conclusions of several research studies in a 2012 speech. In general, as income inequality increases:
- More income shifts to the wealthy, who tend to consume less of each marginal dollar, slowing consumption and therefore economic growth;
- Income mobility falls: parents' income better predicts their children's income;
- Middle and lower-income families borrow more to maintain their consumption, a contributing factor to financial crises; and
- The wealthy gain more political power, which results in policies that further slow economic growth.
Many economists and related experts believe that America's growing income inequality is "deeply worrying", unjust, a danger to democracy/social stability, or a sign of national decline. Yale professor Robert Shiller (2013 Economics Nobel prize for economics winner), said after receiving the award, "The most important problem that we are facing now today, I think, is rising inequality in the United States and elsewhere in the world." Piketty who has spent nearly 20 years studying inequality primarily in the US, warned that "The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century's globalized economy."
Others claim that the increase is not significant, that America's economic growth and/or equality of opportunity should be the primary focus, that rising inequaity is a global phenomenon that would be foolish to try to change through US domestic policy, that it "has many economic benefits and is the result of ... a well-functioning economy", and has or may become an excuse for "class-warfare rhetoric", and may lead to policies that "reduce the well-being of wealthier individuals".
Views that income inequality slows economic growth
Krueger wrote in 2012: "The rise in inequality in the United States over the last three decades has reached the point that inequality in incomes is causing an unhealthy division in opportunities, and is a threat to our economic growth. Restoring a greater degree of fairness to the U.S. job market would be good for businesses, good for the economy, and good for the country." Krueger wrote that nearly $1.1 trillion of annual income shifted to the 1% over the 1979 to 2007 period. Since the wealthy tend to save nearly 50% of their marginal income while the remainder of the population saves roughly 10%, other things equal this would reduce annual consumption (the largest component of GDP) by as much as 5%. Krueger wrote that borrowing likely helped many households make up for this shift.
Inequality in land and income ownership is negatively correlated with subsequent economic growth. Increasing inequality harms growth in countries with high levels of urbanization.
High unemployment rates have a significant negative effect when interacting with increases in inequality. High unemployment also has a negative effect on long-run economic growth. Unemployment may seriously harm growth because resources sit idle, because it generates redistributive pressures and distortions, because it idles existing human capital and deters its accumulation, because it drives people to poverty, because it results in liquidity constraints that limit labor mobility, and because it erodes individual self-esteem and promotes social dislocation, unrest and conflict. Policies to control unemployment and reduce its inequality-associated effects can strengthen long-run growth.
Concern extends even to conservative economists such as former Federal Reserve Board chairman Alan Greenspan, who stated about growing inequality: "This is not the type of thing which a democratic society – a capitalist democratic society – can really accept without addressing." Economists such as David Moss, Krugman and Raghuram Rajan believe the "Great Divergence" may be connected to the 2008 financial crisis.
Even conservatives must acknowledge that return on capital investment, and the liquid stocks and bonds that mimic it, are ultimately dependent on returns to labor in the form of jobs and real wage gains. If Main Street is unemployed and undercompensated, capital can only travel so far down Prosperity Road.... Investors/policymakers of the world wake up – you're killing the proletariat goose that lays your golden eggs."
A December 2013 Associated Press survey of three dozen economists', a 2014 report by Standard and Poor's and economists Gar Alperovitz, Robert Reich, Joseph Stiglitz, Branko Milanovic and Robert Gordon agree about the harms of inequality.
The majority of the Associated Press survey respondents agreed that widening income disparity was harming the US economy. They argue that wealthy Americans are receiving higher pay, but they spend less per dollar earned than middle class consumers, the majority of the population, whose incomes have largely stagnated.
The S&P report concluded that diverging income inequality had slowed the recoveand could contribute to future boom-and-bust cycles given increasing personal debt levels. Higher levels of income inequality increase political pressures, discouraging trade, investment, hiring, and social mobility according to the report.
Stiglitz argued that wealth and income concentration leads the economic elite to protect themselves from redistributive policies by weakening the state, which lessens public investments – roads, technology, education, etc. – that are essential for economic growth.: 85
Milanovic stated that while traditionally economists thought inequality was good for growth, "The view that income inequality harms growth – or that improved equality can help sustain growth – has become more widely held in recent years. The main reason for this shift is the increasing importance of human capital in development. When physical capital mattered most, savings and investments were key. Then it was important to have a large contingent of rich people who could save a greater proportion of their income than the poor and invest it in physical capital. But now that human capital is scarcer than machines, widespread education has become the secret to growth" and that while "broadly accessible education" is difficult to achieve under inequality, education tends to reduce income gaps.
Gordon wrote that such issues as 'rising inequality; factor price equalization stemming from the interplay between globalization and the Internet; the twin educational problems of cost inflation in higher education and poor secondary student performance; the consequences of environmental regulations and taxes ..." make economic growth harder to achieve.
Views that income inequality does not slow growth
In response to the Occupy movement, legal scholar Richard Epstein defended inequality in a free market society, maintaining that "taxing the top one percent even more means less wealth and fewer jobs for the rest of us." According to Epstein, "the inequalities in wealth ... pay for themselves by the vast increases in wealth", while "forced transfers of wealth through taxation ... will destroy the pools of wealth that are needed to generate new ventures. Jared Bernstein stated: "In sum, I'd consider the question of the extent to which higher inequality lowers growth to be an open one, worthy of much deeper research". Tim Worstall commented that capitalism would not seem to contribute to an inherited-wealth stagnation and consolidation, but instead appears to promote the opposite, a vigorous, ongoing turnover and creation of new wealth.
Likelihood of financial crises
Income inequality was cited as one of the causes of the Great Depression by Supreme Court Justice Louis D. Brandeis in 1933. In his dissent in the Louis K. Liggett Co. v. Lee (288 U.S. 517) case, he wrote: "Other writers have shown that, coincident with the growth of these giant corporations, there has occurred a marked concentration of individual wealth; and that the resulting disparity in incomes is a major cause of the existing depression."
Rajan argued that "systematic economic inequalities, within the United States and around the world, have created deep financial 'fault lines' that have made [financial] crises more likely to happen than in the past".
Monopolization of labor, consolidation, and competition
Greater income inequality can lead to monopolization, resulting in fewer employers requiring fewer workers. Remaining employers can consolidate and take advantage of the relative lack of competition.
Income inequality is claimed to lower aggregate demand, leading to large segments of formerly middle class consumers unable to afford as many goods and services. This pushes production and overall employment down.
The ability to move from one income group into another (income mobility) is a measure of economic opportunity. A higher probability of upward income mobility theoretically would help mitigate higher income inequality, as each generation has a better chance of achieving higher income.
Several studies indicated that higher income inequality is associated with lower income mobility. In other words, income brackets tend to be increasingly "sticky" as income inequality increases. This is described by a concept called the Great Gatsby curve. Noah summarized this as "you can't really experience ever-growing income inequality without experiencing a decline in Horatio Alger-style upward mobility because (to use a frequently-employed metaphor) it's harder to climb a ladder when the rungs are farther apart."
One study examined the effects of institutional change on age-based labor market inequalities in Europe. According to the study, unemployment protection and temporary work regulation affect the dynamics of age-based inequality. Strong unions were associated with positive employment effects on all individuals.
A 2013 Brookings Institution study claimed that income inequality was increasing and becoming permanent, sharply reducing social mobility. A 2007 study found the top population in the United States "very stable" and that income mobility had "not mitigated the dramatic increase in annual earnings concentration since the 1970s."
Krugman attacked conservatives for resorting to an "extraordinary series of attempts at statistical distortion". He argued that while in any given year, some of the people with low incomes will be "workers on temporary layoff, small businessmen taking writeoffs, farmers hit by bad weather" – the rise in their income in succeeding years is not the same 'mobility' as poor people rising to middle class or middle income rising to high income. It's the mobility of "the guy who works in the college bookstore and has a real job by his early thirties."
Studies by the Urban Institute and the US Treasury have both found that about half of the families who start in either the top or the bottom quintile of the income distribution are still there after a decade, and that only 3 to 6% rise from bottom to top or fall from top to bottom.
On the issue of whether most Americans do not stay put in any one income bracket, the 2011 CBO distribution of income study reported:
Household income measured over a multi-year period is more equally distributed than income measured over one year, although only modestly so. Given the fairly substantial movement of households across income groups over time, it might seem that income measured over a number of years should be significantly more equally distributed than income measured over one year. However, much of the movement of households involves changes in income that are large enough to push households into different income groups but not large enough to greatly affect the overall distribution of income. Multi-year income measures also show the same pattern of increasing inequality over time as is observed in annual measures.
Looking at the issue of how frequently workers or households move into higher or lower quintiles as their income rises or falls over the years, the
Several studies found the ability of children from poor or middle-class families to rise to upper income – known as "upward relative intergenerational mobility" – is lower in the US than in other developed countries – and at least two economists found lower mobility to be linked to income inequality.
In their Great Gatsby curve, Krueger and labor economist Miles Corak found a negative correlation between inequality and social mobility. The curve plotted intergenerational income mobility, the likelihood that someone will match their parents' relative income level – and inequality for various countries.
The connection between income inequality and low mobility can be explained by the lack of access and preparation for better schools that is crucial to high-paying jobs; lack of health care may lead to obesity and diabetes and limit education and employment.
Krueger estimated that "the persistence in the advantages and disadvantages of income passed from parents to the children" will "rise by about a quarter for the next generation as a result of the rise in inequality that the U.S. has seen in the last 25 years."
Greater income inequality can increase the market income poverty rate, as income shifts from lower income brackets to upper brackets. Bernstein wrote, "If less of the economy's market-generated growth – i.e., before taxes and transfers kick in – ends up in the lower reaches of the income scale, either there will be more poverty for any given level of GDP growth, or there will have to be a lot more transfers to offset inequality's poverty-inducing impact." The Economic Policy Institute (EPI) estimated that greater income inequality added 5.5% to the poverty rate between 1979 and 2007, other factors equal. Income inequality was the largest driver of the change in the poverty rate, with economic growth, family structure, education and race other important factors. An estimated 11.8% of Americans lived in poverty in 2018, versus 16% in 2012 and 26% in 1967.
A rise in income disparities weakens skills development among people with a poor educational background in terms of the quantity and quality of education attained. Those with a low level of expertise will always consider themselves unworthy of any high position and pay.
Further enrichment of corporate executives
Lisa Shalett, chief investment officer at Merrill Lynch Wealth Management noted that, "for the last two decades and especially in the current period, ... productivity soared ... [but] U.S. real average hourly earnings are essentially flat to down, with today's inflation-adjusted wage equating to about the same level as that attained by workers in 1970. ... So where have the benefits of technology-driven productivity cycle gone? Almost exclusively to corporations and their very top executives." A study by Kristal and Cohen showed that rising wage inequality brought about an unhealthy competition between institutions and technology. The technological changes aided high-skilled workers and were the primary cause of inequality.
Economist Timothy Smeeding summed up the current trend:
Americans have the highest income inequality in the rich world and over the past 20–30 years Americans have also experienced the greatest increase in income inequality among rich nations. The more detailed the data we can use to observe this change, the more skewed the change appears to be ... the majority of large gains are indeed at the top of the distribution.
According to Janet Yellen,
... from 1973 to 2005, real hourly wages of those in the 90th percentile – where most people have college or advanced degrees – rose by 30% or more ... among this top 10 percent, the growth was heavily concentrated at the very tip of the top, that is, the top 1 percent. This includes the people who earn the very highest salaries in the U.S. economy, like sports and entertainment stars, investment bankers and venture capitalists, corporate attorneys, and CEOs. In contrast, at the 50th percentile and below – where many people have at most a high school diploma – real wages rose by only 5 to 10%.
Income inequality may be the driving factor in growing household debt, as high earners bid up the price of real estate and middle income earners go deeper into debt trying to maintain what once was a middle class lifestyle. Between 1983 and 2007, the top 5 percent saw their debt fall from 80 cents for every dollar of income to 65 cents, while the bottom 95 percent saw their debt rise from 60 cents for every dollar of income to $1.40. Krugman found a strong correlation between inequality and household debt during the twentieth and early twenty-first centuries.
Twenty-first century college costs have risen much faster than income, resulting in an increase in student loan debt from $260 billion in 2004 to $1.1 trillion in 2014. From 1995 to 2013, outstanding education debt grew from 26% of average yearly income to 58%, for households with net worth below the 50th percentile.
Democracy and society
Bernstein and Krugman assessed the concentration of income as variously "unsustainable" and "incompatible" with democracy. American political scientists Jacob S. Hacker and Paul Pierson quote a warning by Greek-Roman historian Plutarch: "An imbalance between rich and poor is the oldest and most fatal ailment of all republics." Some academic researchers alleged that the US political system risks drifting towards oligarchy, through the influence of corporations, the wealthy and other special interest groups.
Rising income inequality has been linked to political polarization. According to a 2013 study, elected officials tend to be more responsive to the upper income bracket and ignore lower income groups.
Krugman wrote in 2014, "The basic story of political polarization over the past few decades is that, as a wealthy minority has pulled away economically from the rest of the country, it has pulled one major party along with it ... Any policy that benefits lower- and middle-income Americans at the expense of the elite – like health reform, which guarantees insurance to all and pays for that guarantee in part with taxes on higher incomes – will face bitter Republican opposition." He used environmental protection as another example, which became a partisan issue only after the 1990s.
As income inequality increased, the degree of House of Representatives polarization measured by voting record followed. Inequality increased influence by the rich on the regulatory, legislative and electoral processes. McCarty, Pool and Rosenthal wrote in 2007 that Republicans had then moved away from redistributive policies that would reduce income inequality, whereas earlier, they had supported redistributive policies such as the EITC. Polarization thus completed a feedback loop, worsening inequality.
The IMF warned in 2017 that rising income inequality within Western nations, in particular the United States, could result in further political polarization.
Several economists and political scientists argued that income inequality translates into political inequality, as when politicians have financial incentives to accommodate special interest groups. Researchers such as Larry Bartels found that politicians are significantly more responsive to the political opinions of the wealthy, even when controlling for a range of variables including educational attainment and political knowledge.
Discussions of income inequality and capital vs. labor debates sometimes address class warfare, from President Theodore Roosevelt (referring to the leaders of big corporations as "malefactors of great wealth"), to President Franklin Roosevelt ("economic royalists ... are unanimous in their hate for me--and I welcome their hatred"), to the more recent "1% versus the 99%" issue and the question of which political party better represents the middle class.
Investor Warren Buffett said in 2006, "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning." He advocated much higher taxes on the wealthiest Americans.
Robert Frank noted, "Today's rich had formed their own virtual country .. [T]hey had built a self-contained world unto themselves, complete with their own health-care system (concierge doctors), travel network (Net jets, destination clubs), separate economy ... The rich weren't just getting richer; they were becoming financial foreigners, creating their own country within a country, their own society within a society, and their economy within an economy."F
George Packer wrote, "Inequality hardens society into a class system ... Inequality divides us from one another in schools, in neighborhoods, at work, on airplanes, in hospitals, in what we eat, in the condition of our bodies, in what we think, in our children's futures, in how we die. Inequality makes it harder to imagine the lives of others."
Increasing inequality is both a cause and effect of political change, according to journalist Hedrick Smith. In the decade starting around 2000, business groups employed 30 times as many Washington lobbyists as did trade unions and 16 times as many lobbyists as labor, consumer, and public interest lobbyists combined.
Shifts toward foreign outsourcing of labor decreased income for the middle class. According to Paul Davidson, "The outsourcing movement was rationalized and supported by government policies under the banner of free trade - where many mainstream economists insisted that the result would be, under the law of comparative advantage, an increase in prosperity for all Americans. Nevertheless, it is obvious by the first decade of the twenty-first century American workers have not seen the promised prosperity of the law of comparative advantage... The American middle class had been significantly hollowed out."
From 1998 through 2010 business interests and trade groups spent $28.6 billion on lobbying compared with $492 million for labor, nearly a 60-to-1 business advantage.
The result, according to Smith, is a political landscape dominated in the 1990s and 2000s by business groups, specifically "political insiders" – former members of Congress and government officials with an inside track – working for "Wall Street banks, the oil, defense, and pharmaceutical industries; and business trade associations." In the decade or so prior to the Great Divergence, middle-class-dominated reformist grassroots efforts – such as civil rights movement, environmental movement, consumer movement, labor movement – had considerable political impact.
Stiglitz argued that inequality may explain political questions – such as why America's infrastructure (and other public investments) are deteriorating,: 92 or the country's recent relative lack of reluctance to engage in military conflicts such as the 2003 Iraq war. Top-earning families have the money to buy their own education, medical care, personal security, and parks. They showed little interest in helping pay for such things for the rest of society, and have the political influence to make sure they don't have to. The relatively few children of the wealthy who joined the military may have reduced their concern about going to war.
The US has relatively high rates of health problems and social problems, (obesity, mental illness, homicides, suicides, teenage births, incarceration, child conflict, drug use) and lower rates of social goods (life expectancy, educational performance, trust among strangers, women's status and social mobility) compared to other developed countries.
Using statistics from 23 developed countries and the 50 states of the US, British researchers Richard G. Wilkinson and Kate Pickett found a correlation that remains after accounting for ethnicity, national culture and occupational classes or education levels. Their findings place the United States as the most unequal and ranks poorly on social and health problems among developed countries. The authors argue inequality creates psychosocial stress and status anxiety that lead to social ills.
A 2009 study attributed one in three deaths in the United States to high levels of inequality. According to The Earth Institute, life satisfaction in the US has been declining over several decades, which they attributed to increasing inequality, lack of social trust and loss of faith in government.
A 2015 study by Angus Deaton and Anne Case found that income inequality could be a driving factor in a marked increase in deaths among white males between the ages of 45 to 54 in the period 1999 to 2013.
According to the Health Inequality Project, the wealthiest American men live 15 years longer than the poorest. For American women the life expectancy gap is 10 years.
Krugman argues that the long-term funding problems of Social Security and Medicare can be blamed in part on the growth in inequality as well as culprits such as longer life expectancy. The traditional source of funding for these programs – payroll taxes – is inadequate. Payroll taxes are not progressive because they do not capture income from capital or income above the payroll tax cap. Inequality thereby reduces the taxable pool. These benefits were intended to be financed entirely from these benefits, but spending increased beyond projections for a variety of reasons.
Education and human capital
Conservative journalist David Brooks argued that in the 1970s, high school and college graduates had "very similar family structures", while later high school grads were much less likely to get married and become active in their communities, and much more likely to smoke, be obese, get divorced, or have "a child out of wedlock."
The zooming wealth of the top one percent is a problem, but it's not nearly as big a problem as the tens of millions of Americans who have dropped out of high school or college. It's not nearly as big a problem as the 40 percent of children who are born out of wedlock. It's not nearly as big a problem as the nation's stagnant human capital, its stagnant social mobility and the disorganized social fabric for the bottom 50 percent.
Classical liberals such as Friedrich Hayek maintained that because individuals are diverse and different, state intervention to redistribute income is inevitably arbitrary and incompatible with the concept of the rule of law, and that "what is called 'social' or distributive' justice is indeed meaningless within a spontaneous order". Those who would use the state to redistribute, "take freedom for granted and ignore the preconditions necessary for its survival."
In 1998 a Gallup poll had found 52% of Americans agreeing that the gap between rich and the poor was a problem that needed to be fixed, while 45% regarded it as "an acceptable part of the economic system".
The growth of inequality provoked the Occupy protest movement that spread to 600 communities in 2011. Its main political slogan – "We are the 99%" – referenced its dissatisfaction with the era's income inequality. However, a December 2011 Gallup poll found a decline in the number of Americans who rated reducing the gap in income and wealth between the rich and the poor as extremely or very important (21 percent of Republicans, 43 percent of independents, and 72 percent of Democrats). Those numbers are reversed: Only 45% see the gap as in need of fixing, while 52% do not. However, there was a large difference between Democrats and Republicans, with 71% of Democrats calling for a fix.
In 2012, surveys found the issue ranked below economic issues such as growth and equality of opportunity, and ranked relatively low in affecting voters "personally".
A January 2014 poll found 61% of Republicans, 68% of Democrats and 67% of independents accept that income inequality in the US had grown over the last decade. The poll indicated that 69% of Americans supported the government doing "a lot" or "some" to address income inequality and that 73% of Americans supported raising the minimum wage from $7.25 to $10.10 per hour.
Surveys found that Americans matched citizens of other nations about what equality was acceptable, but more accepting of what they thought the level was. Dan Ariely and Michael Norton found in a 2011 study that US citizens significantly underestimated wealth inequality. Stiglitz argued that this sense of unfairness led to distrust in government and business.
States and cities
Income inequality (as measured by the Gini coefficient) is not uniform among the states: after-tax income inequality in 2009 was greatest in Texas and lowest in Maine. Income inequality has grown from 2005 to 2012 in more than 2 out of 3 metropolitan areas.
Comparisons by state
The household income Gini index for the United States was 0.468 in 2009, according to the US Census Bureau, though it varied significantly between states. The states of Utah, Alaska and Wyoming have a pre-tax income inequality Gini coefficient that is 10% lower than the average, while Washington D.C. and Puerto Rico 10% higher. After including the effects of federal and state taxes, the U.S. Federal Reserve estimates 34 states in the USA have a Gini coefficient between 0.30 and 0.35, with the state of Maine the lowest. At the county and municipality levels, the pre-tax Gini index ranged from 0.21 to 0.65 in 2010 across the United States, according to Census Bureau estimates.
Pretax US income inequality is comparable to other developed countries, but is among the highest after taxes and transfers, meaning US policies shift relatively less income from higher to lower income households.
Excluding retirees, market income inequality is comparatively high (rather than moderate) and the level of redistribution is moderate (not low). These comparisons indicate Americans shift from reliance on market income to reliance on income transfers later in life and less fully than in other developed countries.
The US ranked 41st-worst among 141 countries (30th percentile) on income equality measured by Gini. The United Nations, Central Intelligence Agency World Factbook, and OECD used Gini to compare inequality between countries. As of 2006, the US had among the highest Gini inequality among developed countries. While inequality increased after 1981 in two-thirds of OECD countries, most are in the more equal end of the spectrum, with a Gini coefficient in the high twenties to mid thirties.
The US Gini rating (after taxes and government income transfers) puts it among those of less developed countries. The US is more unequal or on par with South American countries such as Guyana, Nicaragua, Venezuela and Uruguay.
Developing country comparative data is available from databases such as the Luxembourg Income Study (LIS) or the OECD Income Distribution database (OECD IDD), or, when including developing countries, from the World Bank’s Povcalnet database, UN-WIDER’s World Income Inequality Database, or the Standardized World Income Inequality Database.
Reasons for relative performance
One 2013 study indicated that pretax US income inequality was comparable to other developed countries, but was the highest among 22 developed countries after taxes and transfers. This implies that public policy choices, rather than market factors, drive U.S. income inequality disparities relative to other developed nations.
Leonhardt and Quealy in 2014 described three key reasons for other industrialized countries improving real median income relative to the US over the 2000-2010 period. In the US:
- educational attainment has risen more slowly;
- companies pay relatively lower wages to the middle class and poor, with top executives making relatively more;
- government redistributes less from rich to poor.
In 2014 Canadian middle class incomes moved higher than those in the US and in some European nations citizens received higher raises than their American counterparts. As of that year only the wealthy had seen pay increases since the Great Recession, while average American workers had not.
Debate continues over whether a public policy response is appropriate to income inequality. For example, Federal Reserve Economist Thomas Garrett wrote in 2010: "It is important to understand that income inequality is a byproduct of a well-functioning capitalist economy. Individuals' earnings are directly related to their productivity ... A wary eye should be cast on policies that aim to shrink the income distribution by redistributing income from the more productive to the less productive simply for the sake of 'fairness.'"
While before-tax income inequality is subject to market factors, after-tax income inequality can be directly affected by tax and transfer policy.
Economists have proposed various approaches to reducing income inequality. For example, Yellen described four "building blocks" in a 2014 speech. These included expanding resources available to children, affordable higher education, business ownership and inheritance. Larger tax and transfer-based redistribution could allow US inequality to match that of other developed nations. That year, the Center for American Progress recommended tax reform, subsidizing healthcare and higher education and strengthening unions as appropriate responses.
Increasing infrastructure spending would address both the causes and the effects of inequality. Infrastructure would e.g., allow workers with limited mobility to take higher-paying jobs further from their residences and simultaneously allow them to access beneficial services at lower cost.
Public policy responses addressing effects of income inequality include: progressive tax incidence adjustments, strengthening social safety net provisions such as Temporary Assistance for Needy Families, welfare, the food stamp program, Social Security, Medicare, and Medicaid.
Proposal that address the causes of inequality include increasing and reforming higher education subsidies and placing limits on and taxing rent-seeking. Politicians offered proposals for increasing wages, such as raising the minimum wage, infrastructure stimulus, and tax reform.
Children from lower-income households who get quality pre-kindergarten education are more likely to graduate from high school, attend college, hold a job and have higher earnings. In 2010, the U.S. ranked 28th out of 38 advanced countries in the share of four-year-olds enrolled in early childhood education. Among developed countries, 70% of 3-year-olds go to preschool, versus 38% in the United States.
Per-pupil spending in state-funded programs declined by 12% after inflation from 2010-2014. The US differs from other countries in that it funds public education primarily through sub-national (state and local) taxes. The quality of funding for public education varies based on the tax base of the school system, with significant variation in spending per pupil.
Children from higher-income families often attend higher-quality private schools or are home-schooled. Better teachers raise the educational attainment and future earnings of students, but they tend to migrate school districts that educate higher income children.
Median annual earnings of full-time workers with a four-year bachelor's degree is 79% higher than for those with only a high school diploma. The wage premium for a graduate degree is still higher. The unemployment rate is also considerably lower for those with higher educational attainment. A college education is nearly free in many European countries, often funded by taxes, although a smaller percentage of students attend college than in the US.
- "In 2014, households in the lowest and second quintiles [the bottom 40%] received an average of an additional $690 and $560 respectively, because of the ACA ..."
- "Most of the burden of the ACA fell on households in the top 1% of the income distribution, and relatively little fell on the remainder of households in that quintile. Households in the top 1% paid an additional $21,000, primarily because of the net investment income tax and the additional Medicare tax."
Public welfare and infrastructure spending
OECD asserts that public spending is vital in reducing the wealth gap. Lane Kenworthy advocates incremental reforms to the US welfare state in the direction of the Nordic social democratic model, claiming that this would increase economic security and opportunity. As of 2012 the U.S. had the weakest social safety net among developed nations.
Welfare may encourage the poor not to seek remunerative work and encourage dependency on the state. Conversely, eliminating social safety nets can discourage entrepreneurs by increasing the consequences of business failure from a temporary setback to financial ruin.
Income taxes provide one mechanism for addressing income after-tax inequality. Increasing the progressivity of income taxes can reduce the differences between higher and lower incomes. However, taxes paid may not reflect statutory rates because various (legal) tax avoidance strategies that exploit tax expenditures can allow payers to avoid the higher rates.
Tax expenditures (i.e., exclusions, deductions, preferential tax rates, and tax credits) cause revenues to be lower than otherwise. The benefits from tax expenditures, such as income exclusions for healthcare insurance premiums paid for by employers and tax deductions for mortgage interest, are distributed unevenly across the income spectrum. According a 2014 CBO report:
- The top 10 tax expenditures totaled $900 billion.
- Tax expenditures tend to benefit those at the top and bottom of the income distribution, but less so in the middle.
- The top 20% of income earners received approximately 50% of the benefit from them; the top 1% received 17% of the benefits.
- The largest single tax expenditure was the exclusion of employer-sponsored health insurance ($250 billion).
- Taxing capital gains and dividends at a lower rate than earned income reduced revenues by as much as $160 billion; the top 1% received 68% of the benefit.
Understanding how each tax expenditure is distributed across the income spectrum can inform policy choices.
Economist Dean Baker argued that the existence of corporate tax loopholes, deductions and credits for corporations contributes to rising income inequality by permitting them to reduce their tax burden and by permitting accounting firms to increase their revenues by charging for advice on reducing tax payments. He alleged that this redistributes money that would otherwise be taxed to higher income individuals. He noted that since a large portion of corporate income is reinvested, taxing corporate income amounts to a tax on investment, which would encourage firms to invest less. He concluded that eliminating the corporate income tax, while needing to be offset by revenue increases elsewhere, would reduce income inequality.
The US typically sets its national minimum wage at a lower fraction of median income than other developed countries, in 2013, 38% of median income. Individual states and cities may define higher minimum wages for their jurisdictions. Whether minimum wages reduce employment is a subject of debate, in part depending on how the minimum is relative to the median.
The U.S. minimum wage was set at $7.25 per hour in July 2009. As of January 2018, 29 states had minimum wages above the federal minimum. Over 90% of American workers earn greater than the minimum.
Others argue for a public basic income. Each individual would receive a fixed sum from the government, without consideration of factors such as age, employment, education, etc. Supporters include Martin Luther King, Jr., Milton Friedman (in the form of a negative income tax), Robert Anton Wilson, Gary Johnson (In the form of the fair tax "prebate"), Charles Murray,  2020 presidential candidate Andrew Yang and the Green Party.
A proposal of basic income would disproportionately assist lower and middle classes to develop an economic floor for survival (around the poverty line). The idea was supported by Martin Luther King Jr. up towards his assassination. Basic income passed the US House of Representatives under Nixon in 1969 but stalled in the Senate over negotiations on the income cap.
Monetary policy is responsible for balancing inflation and unemployment. It can be used to stimulate the economy (e.g., by lowering interest rates, which encourages borrowing and spending, additional job creation, and inflationary pressure); or tighten it, with the opposite effects. Former Fed Chair Ben Bernanke wrote in 2015 that monetary policy affects income and wealth inequality in multiple ways, but that responsibility lies primarily in other areas:
- Stimulus reduces inequality by creating or preserving jobs, which mainly helps the middle and lower classes who derive more of their income from labor than the wealthy.
- Stimulus inflates the prices of financial assets (owned mainly by the wealthy), but also employment, housing and the value of small businesses (owned more widely).
- Stimulus increases inflation and/or lowers interest rates, which helps debtors (mainly the middle and lower classes) while hurting creditors (mainly the wealthy), because they are paid back with cheaper dollars or reduced interest.
Various methods measure income inequality. Different sources prefer gini coefficients or ratio of percentiles, etc. Census Bureau studies on household and individual income show lower levels than some other sources, but do not break out the highest-income households (99%+) where most change has occurred.:6–7
Two commonly cited estimates are the CBO and Emmanuel Saez. These differ in their sources and methods. According to Saez, for 2011 the share of "market income less transfers" received by the top 1% was about 19.5%. Saez used IRS data in this measure. The CBO uses both IRS data and Census data in its computations and reported a lower "pre-tax" figure for the top 1% of 14.6%.
Saez and Piketty pioneered the use of IRS income data to analyze income distribution. They found that the share of income held by the top 1 percent was as large in 2005 as in 1928.
Research published in 2014 by Saez and Gabriel Zucman revealed that more than half of those in the top 1 percent had not experienced relative gains in wealth between 1960 and 2012. In fact, those between the top 1 percent and top .5 percent had lost relative wealth. Only those in the top .1 percent and above had made relative wealth gains during that time.
Census Bureau data
The comparative use of Census Bureau data, as well as most sources of demographic income data, has been questioned by statisticians for its inability to account for income mobility. At any given time, the Census Bureau ranks all households by household income and then divides them into quintiles. The highest-ranked household in each quintile provides the upper income limit for that quintile.
Comparing changes in these upper income limits for different quintiles reflects changes between one moment and the next. The problem with inferring income inequality on this basis is that the it provides only point-in-time snapshots. The statistics do not reflect the reality that income varies over time. For most people, income increases over time as they move from their first, low-paying job up the income ladder. Workers may income over time because of business-cycle contractions, demotions, career changes, retirement, etc. Investment income can be highly volatile. The implication is that individual households do not remain in the same income quintiles over time. Thus, comparing quintiles over time is like comparing apples to oranges, because it means comparing incomes of different people at different life stages.
Gary Burtless noted that those who use U.S. census data fail to recognize recent and significant lower- and middle-income gains, primarily because census data does not capture key information: "A commonly used indicator of middle class income is the Census Bureau's estimate of median household money income. The main problem with this income measure is that it only reflects households' before-tax cash incomes. It fails to account for changing tax burdens and the impact of income sources that do not take the form of cash. This means, for example, that tax cuts in 2001-2003 and 2008-2012 are missed in the census statistics. Furthermore, the Census Bureau measure ignores income received as in-kind benefits and health insurance coverage from employers and the government. By ignoring such benefits as well as sizeable tax cuts in the recession, the Census Bureau's money income measure seriously overstated the income losses that middle-income families suffered in the recession."
Income measures: pre-and post-tax
Inequality can be measured before and after the effects of taxes and transfer payments such as social security and unemployment insurance.
- Market income, or income before taxes & transfers: Expertise, productiveness and work experience, inheritance, gender, and race have had a strong influence on distribution of personal income in the United States as in other countries.
- After taxes & transfers: Reducing the progressivity of the income tax system and transfers increases income inequality. CBO reported in 2011 that: "The equalizing effect of transfers declined over the 1979–2007 period primarily because the distribution of transfers became less progressive. The equalizing effect of federal taxes also declined over the period, in part because the amount of federal taxes shrank as a share of market income and in part because of changes in the progressivity of the federal tax system."
New CBO income statistics show the growing importance of these items. In 1980, in-kind benefits and employer and government spending on health insurance accounted for just 6% of the after-tax incomes of households in the middle one-fifth of the distribution. By 2010 these in-kind income sources represented 17% of middle class households' after-tax income. Post-tax income items are increasing faster than pre-tax items. As a result of these programs, the spendable incomes of poor and middle-class families have been better insulated against recession-driven losses than the incomes of Americans in the top 1%. Incomes in the middle and at the bottom of the distribution have fared better since 2000 than incomes at the very top.
Comparisons of household income over time should control for changes in average age, family size, number of breadwinners, and other characteristics. Measuring personal income ignores dependent children, but household income also has problems – a household of ten has a lower standard of living than one of two people, though their incomes may be the same. People's earnings tend to rise over their working lifetimes, so "snapshot measures of income inequality can be misleading." The inequality of a recent college graduate and a 55-year-old at the peak of his/her career is not an issue if the graduate has the same career path.
Conservative researchers and organizations have focused on the flaws of household income as a measure for standard of living in order to refute claims that income inequality is growing, is excessive or posing a problem for society. According to sociologist Dennis Gilbert, growing inequality can be explained in part by growing participation of women in the workforce. High earning households are more likely to be dual earner households. According to a 2004 analysis of income quintile data by the Heritage Foundation, inequality is less after adjusting household income for household size. Aggregate share of income held by the upper quintile (the top earning 20 percent) decreases by 20.3% when figures are adjusted to reflect household size.
However the Pew Research Center found household income declined less than individual income in the twenty-first century, because those no longer able to afford separate housing moved in with relatives, creating larger households with more income earners. A 2011 CBO study adjusts for household size so that its quintiles contain an equal number of people, not an equal number of households.:2 CBO found income distribution over a multi-year period "modestly" more equal than annual income.:4 The CBO study confirms earlier studies.
Overall, according to Timothy Noah, correcting for demographic factors (today's population is older than it was 33 years ago, and divorce and single parenthood have made households smaller), income inequality, though less extreme than shown by the standard measure, is also growing faster than shown by that measure.
The Gini coefficient summarizes income inequality in a single number and is one of the most commonly used measures of income inequality. It uses a scale from 0 to 1 – the higher the number the more inequality. Zero represents perfect equality (everyone having exactly the same income), and 1 represents perfect inequality (one person having all income). (Index scores are commonly multiplied by 100 to make them easier to understand.Schiller, Bradely (2003). The Economy Today (9 ed.). New York, NY: McGraw-Hill.</ref>) Gini index ratings can be used to compare inequality within (by race, gender, employment) and between countries, before and after taxes. Different sources may give different gini values for the same country or population measured. For example, the U.S. Census Bureau's official before-tax Gini coefficient for the United States was 47.6 in 2013, up from 45.4 in 1993, the earliest year for comparable data. By contrast, the OECD's Gini coefficient for income inequality in the United States is 37 in 2012 (including wages and other cash transfers), which is still the highest in the developed world, with the lowest being Denmark (24.3), Norway (25.6), and Sweden (25.9).
A major gap in the measurement of income inequality is the exclusion of capital gains, profits made on increases in the value of investments. Capital gains are excluded for purely practical reasons. The Census doesn't ask about them, so they can't be included in inequality statistics. Obviously, the rich earn much more from investments than the poor. As a result, real levels of income inequality in America are much higher than the official Census Bureau figures would suggest.
The CBO, however, does include capital gains as income in calculating its Gini coefficient. As of 2016, after accounting for taxes and transfers, the Gini stood at.42, indicating that income inequality had not significantly grown since as far back as 1986 when the Gini stood at .42, however had grown from the 1979 level of .35 (the earliest year available).
Wealth inequality is related to income inequality. It refers to the distribution of net worth (i.e., what is owned minus what is owed) as opposed to annual income. Wealth is affected by movements in the prices of assets, such as stocks, bonds and real estate, which fluctuate over the short-term. Income inequality has significant effects over long-term shifts in wealth inequality. Wealth inequality is increasing:
- The top 1% owned approximately 40% of the wealth in 2012, versus 23% in 1978. The top 1% share of wealth was at or below 30% from 1950–1993.
- The top 0.1% owned approximately 22% of the wealth in 2012, versus 7% in 1978. The top 0.1% share of wealth was at or below 10% from 1950–1987.
- The threshold for the wealthiest 1% was approximately $8.4 million measured for the 2008–2010 period. Nearly half the top 1% by income were also in the top 1% by wealth.
The top 400 Americans had net worth of $2 trillion in 2013, more than the bottom 50%. Their average net worth was $5 billion. The lower 50% of households held 3% of the wealth in 1989 and 1% in 2013. Their average net worth in 2013 was approximately $11,000.
In 2010, the 5% wealthiest households had approximately 72% of the financial wealth, while the bottom 80% of households had 5%.
- American Dream
- Economic inequality
- Economic mobility
- Economy of the United States
- Educational attainment in the United States
- High-net-worth individual
- Homelessness in the United States
- Inequality for All – 2013 documentary film presented by Robert Reich
- Income inequality metrics
- Legatum Prosperity Index
- List of countries by income equality
- List of countries by inequality-adjusted HDI
- Median income per household member
- Middle-class squeeze
- Occupy Movement
- Racial inequality in the United States
- Racism in the United States
- Second Bill of Rights
- Socio-economic mobility in the United States
- The Divide: American Injustice in the Age of the Wealth Gap – book
- The Spirit Level: Why More Equal Societies Almost Always Do Better – book
- Social justice
- Tax policy and economic inequality in the United States
- "FACTS: Income Inequality in the United States". inequality.org. Retrieved January 10, 2019.
- "The Distribution of Household Income and Federal Taxes 2011". Congressional Budget Office, US Government. November 2014.
- John Cassidy (November 18, 2013). "American Inequality in Six Charts". The New Yorker.
- Porter, Eduardo (November 12, 2013). "Rethinking the Rise of Inequality". New York Times.
- "Income Inequality in the U.S. in Cross-National Perspective" (PDF). Luxembourg Income Study Center. April 2015.
- "The World Factbook". cia.gov.
- "The Distribution of Household Income and Federal Taxes 2007". Congressional Budget Office, US ；Government. October 2011.
- "Why the gap between worker pay and productivity might be a myth". July 23, 2015.
- Rose, Stephen J. (December 2018). "Measuring Income Inequality in the US: Methodological Issues" (PDF). Urban Institute. Retrieved May 25, 2019.
- Krugman, Paul (2007). The Conscience of a Liberal. W.W. Norton Company, Inc. ISBN 978-0-393-06069-0.
- "Reassessing the Facts about Inequality, Poverty, and Redistribution". Cato Institute. April 24, 2018. Retrieved October 11, 2019.
- "U.S. income inequality, on rise for decades, is now highest since 1928".
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The analysis differs from many other published estimates of tax burdens by encompassing the totality of taxes Americans pay: not just federal income taxes but also corporate taxes, as well as taxes paid at the state and local levels. It also includes the burden of about $250 billion of what Saez and Zucman call “indirect taxes,” such as licenses for motor vehicles and businesses...Not all economists accept Saez and Zucman’s analysis. It is based in part on their previous work, along with French economist Thomas Piketty, on the distribution of wealth and income in American society. Other economists have generated estimates of that distribution that show smaller disparities between the nation’s haves and have-nots.
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- Michael Hiltzik (July 10, 2018). "Employers will do almost anything to find workers to fill jobs — except pay them more". Los Angeles Times. (with historical charts)