Income inequality in the United States has
increased significantly since the 1970s after several decades of stability, meaning the
share of the nation's income received by higher income households has increased. This trend is evident with income measured
both before taxes (market income) as well as after taxes and transfer payments. Income inequality has fluctuated considerably
since measurements began around 1915, moving in an arc between peaks in the 1920s and 2000s,
with a 30-year period of relatively lower inequality between 1950–1980. Recasting the 2012 income using the 1979 income
distribution, the bottom 99% of families would have averaged about $7,100 more income.Measured
for all households, U.S. income inequality is comparable to other developed countries
before taxes and transfers, but is among the highest after taxes and transfers, meaning
the U.S. shifts relatively less income from higher income households to lower income households. 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 Americans shift
from reliance on market income to reliance on income transfers later in life and less
than households in other developed countries do.The U.S.
Ranks around the 30th percentile
in income inequality globally, meaning 70% of countries have a more equal income distribution. U.S. federal tax and transfer policies are
progressive and therefore reduce income inequality measured after taxes and transfers. Tax and transfer policies together reduced
income inequality slightly more in 2011 than in 1979.While there is strong evidence that
it has increased since the 1970s, there is active debate in the United States regarding
the appropriate measurement, causes, effects and solutions to income inequality. The two major political parties have different
approaches to the issue, with Democrats historically emphasizing that economic growth should result
in shared prosperity (i.e., a pro-labor argument advocating income redistribution), while Republicans
tend to avoid government involvement in income and wealth generation (i.e., a pro-capital
argument against redistribution). == Overview == 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 US had the same income distribution it had in 1979, each family in
the bottom 80% of the income distribution would have had $11,000 more per year in income
on average in 2012, or $916 per month. This figure would be $7,100 per year for the
bottom 99% of families comparing 1979 and 2012, or about $600/month.The trend of rising
income inequality is also apparent after taxes and transfers. A 2011 study by the CBO found that the top
earning 1 percent of households increased their income by about 275% after federal taxes
and income transfers over a period between 1979 and 2007, compared to a gain of just
under 40% for the 60 percent in the middle of America's income distribution.
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.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"). == History == === Post-civil war era to around 1937 ===
The level of concentration of income in the United States has fluctuated throughout its
history.
The first era of inequality 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. By 2007, the top 1 percent accounted for 24%
of all income and in between, their share fell below 10% for three decades. === 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. Highly progressive New Deal taxation, the
strengthening of unions, and regulation of the National War Labor Board during World
War II raised the income of the poor and working class and lowered that of top earners. From the early 20th century, when income statistics
started to become available, there has been a "great economic arc" from high inequality
"to relative equality and back again", according to Nobel laureate economist Paul Krugman.For
about three decades ending in the early 1970s, this "middle class society" with a relatively
low level of inequality remained fairly steady , the product of relatively high wages for
the US working class and political support for income leveling government policies.
Wages remained relatively high because American
manufacturing lacked foreign competition, and because of strong trade unions. By 1947 more than a third of non-farm workers
were union members, and unions both raised average wages for their membership, and indirectly,
and to a lesser extent, raised wages for workers in similar occupations not represented by
unions. According to Krugman 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.On the other
hand, a Marxist writing in the 1950s and 1960s believed "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." === Post-1970 increase === The return to high inequality, or to what
Krugman and journalist Timothy Noah have referred as the "Great Divergence", began in the 1970s. Studies have found income grew more unequal
almost continuously except during the economic recessions in 1990–91, 2001 (Dot-com bubble),
and 2007 sub-prime bust.The Great Divergence differs in some ways from the pre-Depression
era inequality.
Before 1937, a larger share of top earners
income came from capital (interest, dividends, income from rent, capital gains). After 1970, income of high-income taxpayers
comes predominantly from labor: employment compensation.Until 2011, the Great Divergence
had not been a major political issue in America, but stagnation of middle-class income was. In 2009 the Barack Obama administration White
House 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 in the country.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%, 18% for the bottom fifth of households.
"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%."According to the
CBO, the major reason for observed rise in unequal distribution of after-tax income was
an increase in market income, that is household 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 solely by their owners),
capital gains (profits realized from the sale of assets and stock options), capital income
(such as interest from deposits, dividends, and rental income), and other income.
Of them, capital gains accounted for 80% of
the increase in market income for the households in top 20%, in the 2000–2007 period. Even over the 1991–2000 period, according
to the CBO, capital gains accounted for 45% of the market income for the top 20% households. In a July 2015 op-ed article, 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 subtracted taxes, the CBO found that the median household's
real income rose by 45%. Adjusting for household size, the gain increased
to 53%. === Effects of 2007–2009 recession ===
Just as higher-income groups are more likely to enjoy financial gains when economic times
are good, they are also likely to suffer more significant income losses during economic
downturns and recessions when they are compared to lower income groups.
Higher-income groups tend to derive relatively
more of their income from more volatile sources related to capital income (business income,
capital gains, and dividends), as opposed to labor income (wages and salaries). For example, in 2011 the top 1% of income
earners derived 37% of their income from labor income, versus 62% for the middle quintile. On the other hand, 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.This effect occurred during the Great Recession of 2007–2009,
when 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 (inflation-adjusted) terms between 2007 and 2009. Other sources of capital income also fell:
interest income by 40% and dividend income by 33%. Wages, the largest source of income, fell
by a more modest 6%. The share of pretax income 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 had their share of pretax income increase from 2007 to 2009. The share of aftertax income received by the
top 1% income group fell from 16.7%, in 2007, to 11.5%, in 2009.
=== 2009–present ===
The distribution of household incomes has become more unequal during the post-2008 economic
recovery as the effects of the recession reversed. CBO reported in November 2014 that the share
of pre-tax income received by the top 1% had risen from 13.3% in 2009 to 14.6% in 2011. During 2012 alone, incomes of the wealthiest
1 percent rose nearly 20%, whereas the income of the remaining 99 percent rose 1% in comparison. By 2012, the share of pre-tax income received
by the top 1% had returned to its pre-crisis peak, at around 23% of the pre-tax income
according to an article in The New Yorker. This is based on widely cited data from economist
Emmanuel Saez, which uses "market income" and relies primarily on IRS data. The CBO uses both IRS data and census data
in its computations and reports a lower pre-tax figure for the top 1%. 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 the 14.6%
CBO reported for 2011. The share of after-tax income received by
the top 1% rose from 11.5% in 2009 to 12.6% in 2011.Between 2010 and 2013, inflation-adjusted
pre-tax income for the bottom 90% of American families fell, with the middle income groups
dropping the most, about 6% for the 40th-60th percentiles and 7% for the 20th-40th percentiles.
Incomes in the top decile rose 2%.During the
2009-2012 recovery period, the top 1% captured 91% of the real income growth per family with
their pre-tax incomes growing 34.7% adjusted for inflation while the pre-tax incomes of
the bottom 99% grew 0.8%. Measured from 2009–2015, the top 1% captured
52% of the total real income growth per family, indicating the recovery was becoming less
"lopsided" in favor of higher income families. By 2015, the top 10% (top decile) had a 50.5%
share of the pre-tax income, close its highest all-time level.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, the economists Peter H.
Lindert and
Jeffrey G. Williamson contended that inequality is the highest it has been since the nation's
founding.French economist 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 the economists
Piketty, Saez, and Gabriel Zucman of University of California, Berkeley demonstrate that inequality
runs much deeper than previous data indicated.
The share of incomes for those in the bottom
half of the U.S. population stagnated and declined during the years 1980 to 2014 from
20% in 1980 to 12% in 2014. By contrast, the top 1% share of income grew
from 12% in 1980 to 20% in 2014. The top 1% now makes on average 81 times more
than the bottom 50% of adults, where as in 1981 they made 27 times more. Pretax incomes for the top 0.001% surged 636%
during the years 1980 to 2014. The economists also note that the growth of
inequality during the 1970s to the 1990s can be attributed to wage growth among top earners,
but the ever-widening gap has been "a capital-driven phenomenon since the late 1990s." They posit 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".
== Causes == According to the CBO and others, "the precise
reasons for the [recent] rapid growth in income at the top are not well understood", but "in
all likelihood," an "interaction of multiple factors" was involved. "Researchers have offered several potential
rationales." Some of these rationales conflict, some overlap. They include: the decline of labor unions. A study in the American Sociological Review,
as well as other scholarly research, using the broadest methodology, estimates that the
decline of unions may account for from one-third to more than one-half of the rise of inequality
among men.
As unions weakened, the vast majority of the
gains from productivity were taken by senior corporate executives, major shareholders and
creditors (e.g. major corporate bondholders, banks and other lenders, etc.). As unions have grown weaker, there has been
less pressure on employers to increase wages, or on lawmakers to enact labor-friendly or
worker-friendly measures. the globalization hypothesis – low skilled
American workers have been losing ground in the face of competition from low-wage workers
in Asia and other "emerging" economies.
Skill-biased technological change – the
rapid pace of progress in information technology has increased the demand for the highly skilled
and educated so that income distribution favored brains rather than brawn;
the superstar hypothesis – modern technologies of communication often turn competition into
a tournament in which the winner is richly rewarded, while the runners-up get far less
than in the past; financialization – changing views of linkages
between the corporate and financial sectors led to a significant increase in the capitalization
of the US stock market. In the decade after 1989, market capitalization
rose from 55% to 155% of GDP. At the same time, corporations began to shift
compensation packages of managers toward stock options, increasing incentives for managers
to make short-term decisions to increase share prices.
Over this period, CEO options increased from
$500,000 to over $3 million per year, allowing stocks to comprise almost 50% of CEO compensation. This further incentivized managers to make
decisions on shareholder payout rather than toward long-term contracts with workers; between
2000 and 2007, nearly 75% of increased stock growth has been 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
earn more than those that do not and have a lower unemployment rate. This explains some of the gap between the
college-educated middle class and lower income persons, but not the 1% leaving the remainder
behind. automation – The Bureau of Labor Statistics
explained that labor's share of income has declined (with an offsetting increase in share
going to capital, generally higher income persons) 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 – movement conservatives
increased their influence over the Republican Party beginning in the 1970s, moving it politically
rightward.
Combined with the Party's expanded political
power (enabled by a shift of southern white Democrats to the Republican Party following
the passage of Civil Rights legislation in the 1960s), 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 indicates policy has a significant influence on inequality; Japan,
Sweden and France have income inequality around 1960 levels.drug use, particularly opioids,
has been cited by the Federal Reserve as one cause of the decline in the labor force participation
rate.Paul Krugman put several of these factors into context in January 2015: "Competition
from emerging-economy exports has surely been a factor depressing wages in wealthier nations,
although probably not the dominant force. More important, soaring incomes at the top
were achieved, in large part, by squeezing those below: by cutting wages, slashing benefits,
crushing unions, and diverting a rising share of national resources to financial wheeling
and dealing …
Perhaps more important still, the wealthy exert a vastly disproportionate
effect on policy. And elite priorities – obsessive concern
with budget deficits, with the supposed need to slash social programs – have done a lot
to deepen [wage stagnation and income inequality]."According to a 2018 report by the OECD, the U.S. has
higher income inequality and a larger percentage of low income workers than almost any other
advanced nation because the unemployed and at-risk workers get almost no support from
the government and are further set back by a very weak collective bargaining system. == Effects: Economic == === Overview ===
There is an ongoing debate as to the economic effects of income inequality. For example, Alan B. Krueger, President Obama's
Chairman of the Council of Economic Advisors, summarized the conclusions of several research
studies in a 2012 speech. In general, as income inequality worsens: More income shifts to the wealthy, who tend
to spend less of each marginal dollar, causing consumption and therefore economic growth
to slow; Income mobility falls, meaning the parents'
income is more likely to predict their children's income;
Middle and lower-income families borrow more money 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.Among economists and related experts,
many 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, who was among
three Americans who won the Nobel prize for economics in 2013, 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." Economist Thomas Piketty, who has spent nearly
20 years studying inequality primarily in the US, warns 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."On the other side of the issue are
those who have claimed that the increase is not significant, that it doesn't matter because
America's economic growth and/or equality of opportunity are what's important, that
it is a global phenomenon which 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". === Economic growth === ==== Views that income inequality slows economic
growth ==== Economist Alan B. 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 the significant shift in
the share of income accruing to the top 1% over the 1979 to 2007 period represented nearly
$1.1 trillion in annual income.
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, which became more difficult in the wake of the 2007–2009
recession.Inequality in land and income ownership is negatively correlated with subsequent economic
growth. A strong demand for redistribution will occur
in societies where a large section of the population does not have access to the productive
resources of the economy.
Rational voters must internalize such issues. High unemployment rates have a significant
negative effect when interacting with increases in inequality. Increasing inequality harms growth in countries
with high levels of urbanization. High and persistent unemployment also has
a negative effect on subsequent long-run economic growth. Unemployment may seriously harm growth because
it is a waste of resources, because it generates redistributive pressures and distortions,
because it depreciates 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 such
supporters (or former supporters) of laissez-faire economics and private sector financiers. Former Federal Reserve Board chairman Alan
Greenspan, has stated reference to growing inequality: "This is not the type of thing
which a democratic society – a capitalist democratic society – can really accept without
addressing." Some economists (David Moss, Paul Krugman,
Raghuram Rajan) believe the "Great Divergence" may be connected to the financial crisis of
2008.
Money manager William H. Gross, former managing
director of PIMCO, criticized the shift in distribution of income from labor to capital
that underlies some of the growth in inequality as unsustainable, saying: 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. He concluded: "Investors/policymakers of the
world wake up – you're killing the proletariat goose that lays your golden eggs." Among economists and reports that find inequality
harming economic growth are a December 2013 Associated Press survey of three dozen economists',
a 2014 report by Standard and Poor's, economists Gar Alperovitz, Robert Reich, Joseph Stiglitz,
and Branko Milanovic. A December 2013 Associated Press survey of
three dozen economists found that the majority believe that widening income disparity is
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.A 2014 report by Standard and Poor's
concluded that diverging income inequality has slowed the economic recovery and could
contribute to boom-and-bust cycles in the future as more and more Americans take on
debt in order to consume.
Higher levels of income inequality increase
political pressures, discouraging trade, investment, hiring, and social mobility according to the
report.Economists Gar Alperovitz and Robert Reich argue that too much concentration of
wealth prevents there being sufficient purchasing power to make the rest of the economy function
effectively.Joseph Stiglitz argues that concentration of wealth and income leads the politically
powerful economic elite seek to protect themselves from redistributive policies by weakening
the state, and this leads to less public investments by the state – roads, technology, education,
etc. – that are essential for economic growth.According to economist Branko Milanovic, 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." He continued that "Broadly accessible education"
is both difficult to achieve when income distribution is uneven and tends to reduce "income gaps
between skilled and unskilled labor."Robert 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 than in the past.
==== Views that income inequality does not
slow growth ==== In response to the Occupy movement Richard
A. 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. One report has found a connection between
lowering high marginal tax rates on high income earners (high marginal tax rates on high income
being a common measure to fight inequality), and higher rates of employment growth.Economic
sociologist Lane Kenworthy has found no correlation between levels of inequality and economic
growth among developed countries, among states of the US, or in the US over the years from
1947 to 2005.
Jared Bernstein found a nuanced relation he
summed up as follows: "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."Central
Banking economist Raghuram Rajan argues 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" – the Financial
crisis of 2007–08 being the most recent example.
To compensate for stagnating and declining
purchasing power, political pressure has developed to extend easier credit to the lower and middle
income earners – particularly to buy homes – and easier credit in general to keep unemployment
rates low. This has given the American economy a tendency
to go "from bubble to bubble" fueled by unsustainable monetary stimulation. === Monopolization of labor, consolidation,
and competition === Greater income inequality can lead to monopolization
of the labor force, resulting in fewer employers requiring fewer workers.
Remaining employers can consolidate and take
advantage of the relative lack of competition, leading to declining customer service, less
consumer choice, market abuses, and relatively higher prices. === Aggregate demand and debt ===
Income inequality lowers aggregate demand, leading to increasingly large segments of
formerly middle class consumers unable to afford as many luxury and essential goods
and services. This pushes production and overall employment
down.Deep debt may lead to bankruptcy and researchers Elizabeth Warren and Amelia Warren
Tyagi found a fivefold increase in the number of families filing for bankruptcy between
1980 and 2005. The bankruptcies came not from increased spending
"on luxuries", but from an "increased spending on housing, largely driven by competition
to get into good school districts." Intensifying inequality may mean a dwindling
number of ever more expensive school districts that compel middle class – or would-be middle
class – to "buy houses they can't really afford, taking on more mortgage debt than
they can safely handle".
== Effects: Socio-economic mobility == === Overview ===
The ability to move from one income group into another (income mobility) is a means
of measuring 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 groups. Conservatives and libertarians such as economist
Thomas Sowell, and Congressman Paul Ryan (R., Wisc.) argue that more important than the
level of equality of results is America's equality of opportunity, especially relative
to other developed countries such as western Europe. Nonetheless, results from various studies
reflect the fact that endogenous regulations and other different rules yield distinct effects
on income inequality.
A study examines the effects of institutional
change on age-based labor market inequalities in Europe. There is a focus on wage-setting institutions
on the adult male population and the rate of their unequal income distribution. According to the study, there is evidence
that unemployment protection and temporary work regulation affect the dynamics of age-based
inequality with positive employment effects of all individuals by the strength of unions. Even though the European Union is within a
favorable economic context with perspectives of growth and development, it is also very
fragile.However, several studies have indicated that higher income inequality corresponds
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. In the words of journalist Timothy Noah, "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." === Over lifetimes ===
The centrist Brookings Institution said in March 2013 that income inequality was increasing
and becoming permanent, sharply reducing social mobility in the US.
A 2007 study (by Kopczuk, Saez and Song in
2007) 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."Economist
Paul Krugman, attacks conservatives for resorting to "extraordinary series of attempts at statistical
distortion". He argues 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
wealth. 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, Krugman quotes from 2011 CBO distribution of income
study 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. In other words, many people who have incomes greater than
$1 million one year fall out of the category the next year – but that's typically because
their income fell from, say, $1.05 million to 0.95 million, not because they went back
to being middle class. === Between generations === Several studies have 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 have found lower mobility linked to income inequality.In
their Great Gatsby curve, White House Council of Economic Advisers Chairman Alan B.
Krueger
and labor economist Miles Corak show a negative correlation between inequality and social
mobility. The curve plotted "intergenerational income
elasticity" – i.e. the likelihood that someone will inherit their parents' relative position
of income level – and inequality for a number of countries.Aside from the proverbial distant
rungs, the connection between income inequality and low mobility can be explained by the lack
of access for un-affluent children to better (more expensive) schools and preparation for
schools crucial to finding high-paying jobs; the lack of health care that may lead to obesity
and diabetes and limit education and employment.Krueger estimates 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." === Poverty === Greater income inequality can increase the
poverty rate, as more income shifts away from lower income brackets to upper income brackets. Jared 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 estimated that
greater income inequality would have 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 16% of Americans lived in poverty
in 2012, versus 26% in 1967.A rise in income disparities weakens skills development among
people with a poor educational background in term 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 top 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." In addition to the technological side of it,
the affected functionality emanates from the perceived unfairness and the reduced trust
of people towards the state. The study by Kristal and Cohen showed that
rising wage inequality has brought about an unhealthy competition between institutions
and technology.
The technological changes, with computerization
of the workplace, seem to give an upper hand to the high-skilled workers as the primary
cause of inequality in America. The qualified will always be considered to
be in a better position as compared to those dealing with hand work leading to replacements
and unequal distribution of resources.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 L.
Yellen, chair of the
Federal Reserve, … 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% – == Effects on democracy and society ==
Economists Jared Bernstein and Paul Krugman have attacked the concentration of income
as variously "unsustainable" and "incompatible" with real 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 have written that
the US political system risks drifting towards a form of oligarchy, through the influence
of corporations, the wealthy, and other special interest groups. === Political polarization ===
Rising income inequality has been linked to the political polarization in Washington DC. According to a 2013 study published in the
Political Research Quarterly, elected officials tend to be more responsive to the upper income
bracket and ignore lower income groups.Paul Krugman wrote in November 2014 that: "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 was not a partisan issue in the 1990s but has since become one.As income
inequality has increased, the degree of House of Representatives polarization measured by
voting record has also increased.
The voting is mostly by the rich and for the
rich making it hard to achieve equal income and resource distribution for the average
population (Bonica et al., 2013). There is a little number of people who turn
to government insurance with the rising wealth and real income since they consider inequality
within the different government sectors. Additionally, there has been an increased
influence by the rich on the regulatory, legislative and electoral processes within the country
that has led to improved employment standards for the bureaucrats and politicians. Professors McCarty, Pool and Rosenthal wrote
in 2007 that polarization and income inequality fell in tandem from 1913 to 1957 and rose
together dramatically from 1977 on. They show that Republicans have moved politically
to the right, away from redistributive policies that would reduce income inequality. Polarization thus creates 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. === Political inequality === Several economists and political scientists
have argued that economic inequality translates into political inequality, particularly in
situations where politicians have financial incentives to respond to special interest
groups and lobbyists.
Researchers such as Larry Bartels of Vanderbilt
University have shown 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. === Class system ===
Historically, discussions of income inequality and capital vs. labor debates have sometimes
included the language of 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 more the recent "1% versus the 99%" issue and the question of which political party
better represents the interests of the middle class.Investor Warren Buffett said in 2006
that: "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, who pay lower effective tax rates than many middle-class persons.Two journalists
concerned about social separation in the US are economist Robert Frank, who notes that:
"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.George
Packer wrote that "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.Even these class levels can affect the politics in certain ways. There has been an increased influence by the
rich on the regulatory, legislative and electoral processes within the country that has led
to improved employment standards for the bureaucrats and politicians. They have a greater influence through their
lobbying and contributions that give them an opportunity to immerse wealth for themselves. === Political change ===
Loss of income by the middle class relative to the top-earning 1% and 0.1% 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 trade unions and 16 times as
many lobbyists as labor, consumer, and public interest lobbyists combined. 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.
Economist Joseph Stiglitz argues that hyper-inequality
may explain political questions – such as why America's infrastructure (and other public
investments) are deteriorating, or the country's recent relative lack of reluctance to engage
in military conflicts such as the 2003 invasion of Iraq. Top-earning families, wealthy enough to buy
their own education, medical care, personal security, and parks, have 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.
So too, the lack of personal or family sacrifice
involved for top earners in the military intervention of their country – their children being
few and far between in the relatively low-paying all-volunteer military – may mean more willingness
by influential wealthy to see its government wage war.Economist Branko Milanovic argued
that globalization and the related competition with cheaper labor from Asia and immigrants
have caused U.S. middle-class wages to stagnate, fueling the rise of populist political candidates
such as Donald Trump. === Health ===
The relatively high rates of health problems and social problems, (obesity, mental illness,
homicides, teenage births, incarceration, child conflict, drug use) and lower rates
of social goods (life expectancy, educational performance, trust among strangers, women's
status, social mobility, even numbers of patents issued per capita), in the US compared to
other developed countries may be related to its high income inequality. Using statistics from 23 developed countries
and the 50 states of the US, British researchers Richard G.
Wilkinson and Kate Pickett have
found such a correlation which remains after accounting for ethnicity, national culture,
and occupational classes or education levels. Their findings, based on UN Human Development
Reports and other sources, locate the United States at the top of the list in regards to
inequality and various 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 conducted by researchers at Harvard
University and published in the British Medical Journal attribute 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 the last several decades, which has been attributed
to soaring inequality, lack of social trust and loss of faith in government.It is claimed
in a 2015 study by Princeton University researchers Angus Deaton and Anne Case 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.
=== Financing of social programs ===
Paul Krugman argues that the much lamented long-term funding problems of Social Security
and Medicare can be blamed in part on the growth in inequality as well as the usual
culprits like longer life expectancies. The traditional source of funding for these
social welfare programs – payroll taxes – is inadequate because it does not capture
income from capital, and income above the payroll tax cap, which make up a larger and
larger share of national income as inequality increases.Upward redistribution of income
is responsible for about 43% of the projected Social Security shortfall over the next 75
years. === Education and human capital === Disagreeing with this focus on the top-earning
1%, and urging attention to the economic and social pathologies of lower-income/lower education
Americans, is conservative journalist David Brooks. Whereas in the 1970s, high school and college
graduates had "very similar family structures", today, high school grads are much less likely
to get married and be 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. Contradicting most of these arguments, classical
liberals such as Friedrich Hayek have maintained that because individuals are diverse and different,
state intervention to redistribute income is inevitably arbitrary and incompatible with
the concept of general rules 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." ==
Public attitudes == The growth of inequality has provoked a political
protest movement – the Occupy movement – starting in Wall Street and spreading to 600 communities
across the United States in 2011. Its main political slogan – "We are the
99%" – references its dissatisfaction with the concentration of income in the top 1%. A December 2011 Gallup poll found a decline
in the number of Americans who felt reducing the gap in income and wealth between the rich
and the poor was extremely or very important (21 percent of Republicans, 43 percent of
independents, and 72 percent of Democrats). In 2012, several surveys of voters' attitudes
toward growing income inequality found the issue ranked less important than other economic
issues such as growth and equality of opportunity, and relatively low in affecting voters "personally". 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".
In 2011, 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 contrast, a January 2014
poll found 61% of Republicans, 68% of Democrats and 67% of independents accept the notion
that income inequality in the US has been growing over the last decade. The Pew Center poll also 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.Opinion surveys of what respondents thought was the right level of inequality have found
Americans no more accepting of income inequality than other citizens of other nations, but
more accepting of what they thought the level of inequality was in their country, being
under the impression that there was less inequality than there actually was.Dan Ariely and Michael
Norton show in a study (2011) that US citizens across the political spectrum significantly
underestimate the current US wealth inequality and would prefer a more egalitarian distribution
of wealth.
Joseph Stiglitz in "The Price of Inequality"
has argued that this sense of unfairness has 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. == International comparisons == === Overall ===
Measured for all households, U.S. income inequality is comparable to other developed countries
before taxes and transfers, but is among the worst after taxes and transfers, meaning the
U.S.
Shifts relatively less income from higher income households to lower income households. 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 Americans shift
from reliance on market income to reliance on income transfers later in life and less
fully than do households in other developed countries.The U.S. was ranked the 41st worst
among 141 countries (30th percentile) on income equality measured by the Gini index. The UN, CIA World Factbook, and OECD have
used the Gini index to compare inequality between countries, and as of 2006, the United
States had one of the highest levels of income inequality among similar developed or high
income countries, as measured by the index.
While inequality has increased since 1981
in two-thirds of OECD countries most developed countries are in the lower, more equal, end
of the spectrum, with a Gini coefficient in the high twenties to mid thirties.The gini
rating (after taxes and government income transfers) of the United States is sufficiently
high, however, to put it among less developed countries. The US ranks above (more unequal than) South
American countries such Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay,
Nicaragua, and Venezuela, according to the CIA.The NYT reported in 2014: "With a big
share of recent income gains in this country flowing to a relatively small slice of high-earning
households, most Americans are not keeping pace with their counterparts around the world." Real median per capita income in many other
industrialized countries was rising from 2000-2010 while the U.S. measure stagnated. The poor in much of Europe receive more than
their U.S.
Counterparts. === Reasons for relative performance ===
One 2013 study indicated that U.S. income inequality is comparable to other developed
countries before taxes and transfers, but rated last (worst) among 22 developed countries
after taxes and transfers. This means that public policy choices, rather
than market factors, drive U.S. income inequality disparities relative to comparable wealthy
nations.Some have argued that inequality is higher in other countries than official statistics
indicate because of unreported income. European countries have higher amounts of
wealth in offshore holdings.The NYT reported in 2014 that there were three key reasons
for other industrialized countries improving real median income relative to the United
States over the 2000-2010 period: Educational attainment in the U.S. has risen
more slowly than much of the industrialized world over the past 30 years;
Companies in the U.S. distribute relatively less of their income as wages to the middle
class and poor than other industrialized countries, with top executives making relatively more,
a lower minimum wage, and weaker unions; and Other industrialized countries have tax policies
that more aggressively redistribute income from rich to poor.
=== Canada ===
According to The New York Times, Canadian middle class incomes are now higher than those
in the United States as of 2014, and some European nations are closing the gap as their
citizens have been receiving higher raises than their American counterparts. Bloomberg reported in August 2014 that only
the wealthy saw pay increases since the 2008 recession, while average American workers
saw no boost in their paychecks. == Policy responses == === Overview ===
Economists have proposed a variety of solutions for addressing income inequality. For example, Federal Reserve Chair Janet Yellen
described four "building blocks" that could help address income and wealth inequality
in an October 2014 speech. These included expanding resources available
to children, affordable higher education, business ownership, and inheritance. While before-tax income inequality is subject
to market factors, 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.
This suggests that more progressive tax and
transfer policies would be required to align the U.S. with other developed nations. The Center for American Progress recommended
a series of steps in September 2014, including tax reform, subsidizing and reducing healthcare
and higher education costs, and strengthening labor influence.However, there is debate regarding
whether a public policy response is appropriate for 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.'"Public policy responses addressing causes and 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, increasing and reforming higher education
subsidies, increasing infrastructure spending, and placing limits on and taxing rent-seeking. Democrat and Republican politicians also provided
a series of recommendations for increasing median wages in December 2014. These included raising the minimum wage, infrastructure
stimulus, and tax reform. === Resources available to children ===
Research shows that children from lower-income households who get good-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 public or private early childhood education. Gains in enrollment stalled after 2010, as
did growth in funding, due to budget cuts arising from the Great Recession. Per-pupil spending in state-funded programs
declined by 12% after inflation since 2010. The U.S. 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 local
taxes and spending per pupil. Better teachers also raise the educational
attainment and future earnings of students, but they tend to migrate to higher income
school districts. Among developed countries, 70% of 3-year-olds
go to preschool, versus 38% in the United States. === Affordable healthcare === Raising taxes on higher income persons to
fund healthcare for lower income persons reduces after-tax inequality.
The CBO described how the Affordable Care
Act (ACA or "Obamacare") reduced income inequality for calendar year 2014 in a March 2018 report: "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." ===
Affordable higher education === Median annual earnings of full-time workers
with a four-year bachelor's degree is 79% higher than the median for those with only
a high school diploma.
The wage premium for a graduate degree is
considerably higher than the undergraduate degree. 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. 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 higher taxes.
=== Public welfare and infrastructure spending
=== The OECD asserts that public spending is vital
in reducing the ever-expanding wealth gap. Lane Kenworthy advocates incremental reforms
to the U.S. welfare state in the direction of the Nordic social democratic model, thereby
increasing economic security and equal opportunity. Currently, the U.S. has the weakest social
safety net of all developed nations.Welfare spending may entice the poor away from finding
remunerative work and toward dependency on the state. Eliminating social safety nets can discourage
free market entrepreneurs by increasing the risk of business failure from a temporary
setback to financial ruin.
=== Taxes on the wealthy === CBO reported that less progressive tax and
transfer policies contributed to an increase in after-tax income inequality between 1979
and 2007. This indicates that more progressive income
tax policies (e.g., higher income taxes on the wealthy and a higher earned-income tax
credit) would reduce after-tax income inequality. Policies enacted under President Obama increased
taxes on the wealthy, including the American Taxpayer Relief Act of 2012 and the Affordable
Care Act.
As reported by The New York Times in January
2014, these laws include several tax increases on individuals earning over $400,000 and couples
earning over $450,000: Raised the top marginal tax rate to 39.6%
from 35%; Raised the rate on dividends and capital gains
by 5 percentage points, to 20 percent; and Two new surcharges – a 3.8% tax on investment
income and a 0.9% tax on regular income.These changes are estimated to add $600 billion
to revenue over 10 years, while leaving the tax burden on everyone else mostly as it was. This reverses a long-term trend of lower tax
rates for upper income persons.The NYT reported in July 2018 that: "The top-earning 1 percent
of households — those earning more than $607,000 a year — will pay a combined $111
billion less this year in federal taxes than they would have if the laws had remained unchanged
since 2000. That's an enormous windfall. It's more, in total dollars, than the tax
cut received over the same period by the entire bottom 60 percent of earners." This represents the tax cuts for the top 1%
from the Bush tax cuts and Trump tax cuts, partially offset by the tax increases on the
top 1% by Obama.The CBO estimated that the average tax rate for the top 1% rose from
28.1% in 2008 to 33.6% in 2013, reducing after-tax income inequality relative to a baseline without
those policies.The economists Emmanuel Saez and Thomas Piketty recommend much higher top
marginal tax rates on the wealthy, up to 50 percent, or 70 percent or even 90 percent.
Ralph Nader, Jeffrey Sachs, the United Front
Against Austerity, among others, call for a financial transactions tax (also known as
the Robin Hood tax) to bolster the social safety net and the public sector.The Pew Center
reported in January 2014 that 54% of Americans supported raising taxes on the wealthy and
corporations to expand aid to the poor. By party, 29% of Republicans and 75% of Democrats
supported this action.During 2012, investor Warren Buffett advocated higher minimum effective
income tax rates on the wealthy, considering all forms of income: "I would suggest 30 percent
of taxable income between $1 million and $10 million, and 35 percent on amounts above that." This would eliminate special treatment for
capital gains and carried interest, which are taxed at lower rates and comprise a relatively
larger share of income for the wealthy.
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%. === Reduce tax expenditures === Tax expenditures (i.e., exclusions, deductions,
preferential tax rates, and tax credits) cause revenues to be much lower than they would
otherwise be for any given tax rate structure. 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. They are often what the Congress offers to
special interests in exchange for their support. According to a report from the CBO that analyzed
the 2013 data: The top 10 tax expenditures totaled $900 billion. This is a proxy for how much they reduced
revenues or increased the annual budget deficit. 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 from income of employer sponsored health insurance ($250 billion). Preferential tax rates on capital gains and
dividends were $160 billion; the top 1% received 68% of the benefit or $109 billion from lower
income tax rates on these types of income.Understanding how each tax expenditure is distributed across
the income spectrum can inform policy choices. === Corporate tax reform ===
Economist Dean Baker argues that the existence of tax loopholes, deductions, and credits
for the corporate income tax contributes to rising income inequality by permitting large
corporations with many accountants to reduce their tax burden and by permitting large accounting
firms to receive payments from smaller businesses in exchange for helping these businesses reduce
their tax burden. He says that this redistributes large sums
of money that would otherwise be taxed to individuals who are already wealthy yet contribute
nothing to society in order to obtain this wealth. He further argues that since a large portion
of corporate income is reinvested in the business, taxing corporate income amounts to a tax on
reinvestment, which he says should be left untaxed. He concludes that eliminating the corporate
income tax, while needing to be offset by revenue increases elsewhere, would reduce
income inequality.
=== Minimum wages === In his 2013 State of the Union address, Barack
Obama proposed raising the federal minimum wage. The progressive economic think tank the Economic
Policy Institute agrees with this position, stating: "Raising the minimum wage would help
reverse the ongoing erosion of wages that has contributed significantly to growing income
inequality." In response to the fast-food worker strikes
of 2013, Labor Secretary Thomas Perez said that it was another sign of the need to raise
the minimum wage for all workers: "It's important to hear that voice …
For all too many people
working minimum wage jobs, the rungs on the ladder of opportunity are feeling further
and further apart."The Economist wrote in December 2013: "A minimum wage, providing
it is not set too high, could thus boost pay with no ill effects on jobs. … America's federal minimum wage, at 38%
of median income, is one of the rich world's lowest. Some studies find no harm to employment from
federal of state minimum wages, others see a small one, but none finds any serious damage."The
U.S. minimum wage was last raised to $7.25 per hour in July 2009. As of December 2013, there were 21 states
with minimum wages above the Federal minimum, with the State of Washington the highest at
$9.32. Ten states index their minimum wage to inflation.The
Pew Center reported in January 2014 that 73% of Americans supported raising the minimum
wage from $7.25 to $10.10 per hour.
By party, 53% of Republicans and 90% of Democrats
favored this action. Also in January 2014, six hundred economists
sent the President and Congress a letter urging for a minimum wage hike to $10.10 an hour
by 2016.In February 2014, the CBO reported the effects of a minimum wage increase under
two scenarios, an increase to $10.10 with indexing for inflation thereafter and an increase
to $9.00 with no indexing: Income inequality would be improved under
both scenarios. Families with income more than 6 times the
poverty threshold would see their incomes fall (due in part to their business profits
declining with higher employee costs), while families with incomes below that threshold
would rise.
Employment would likely fall by 500,000 under
the $10.10 option and 100,000 under the $9.00 option, with a wide range of possible outcomes. Approximately 16.5 million workers would have
their wages rise under the $10.10 option versus 7.5 million under the $9.00 option. The number of persons below the poverty income
threshold would fall by 900,000 under the $10.10 option versus 300,000 under the $9.00
option. === Maximum wage implementation ===
Amalgamated Transit Union international president Lawrence J. Hanley has called for a maximum
wage law, which "would limit the amount of compensation an employer could receive to
a specified multiple of the wage earned by his or her lowest paid employees." CEO pay at the largest 350 U.S. companies
was 20 times the average worker pay in 1965; 58 times in 1989 and 273 times in 2012. === Subsidies and income guarantees ===
Others argue for a basic income guarantee, ranging from civil rights leader Martin Luther
King, Jr.
To libertarians such as Milton Friedman (in the form of negative income tax), Robert
Anton Wilson, Gary Johnson (In the form of the fair tax "prebate") and Charles Murray
to the Green Party. === Rent-seeking limits ===
General limitations on and taxation of rent-seeking is popular with large segments of both Republicans
and Democrats. === Economic democracy ===
The economists Richard D. Wolff and Gar Alperovitz claim that greater economic equality could
be achieved by extending democracy into the economic sphere. In an essay for Harper's Magazine, investigative
journalist Erik Reece argues that "With the political right entrenched in its opposition
to unions, worker-owned cooperatives represent a less divisive yet more radical model for
returning wealth to the workers who earned it." === Monetary policy ===
The effect on income inequality of monetary policy pursued by the Federal Reserve is challenging
to measure. Monetary policy 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 tightened, with the opposite effects.
Former Fed Chair Ben Bernanke wrote in June
2015 that there are several effects on income and wealth inequality from monetary stimulus
that work in opposing directions: Stimulus reduces income 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 housing and the value of small businesses
(owned more widely). Stimulus may increase the rate of inflation
or lower interest rates, which helps debtors (mainly the middle and lower classes) while
hurting creditors (mainly the wealthy), as they are paid back with cheaper dollars or
through lower variable rate loans. == Measurement approaches == === Overview ===
Various methods are used to determine income inequality and different sources may give
different figures for gini coefficients or ratio different ratio of percentiles, etc.. The
United States Census Bureau studies on inequality of household income and individual income
show lower levels of inequality than some other sources (Saez and Piketty, and the CBO),
but do not include data for the highest-income households where most of change in income
distribution has occurred.Two commonly cited sources of income inequality data are the
CBO and economist Emmanuel Saez, which differ somewhat 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%. The two data series were approximately 5 percentage
points apart in recent years. === Internal Revenue Service (IRS) data ===
Pioneers in the use of IRS income data to analyze income distribution are Emmanuel Saez
and Thomas Piketty at the Paris School of Economics showed that the share of income
held by the top 1 percent was as large in 2005 as in 1928.
Other sources that have noted the increased
inequality included economist Janet Yellen who stated, "the growth [in real income] was
heavily concentrated at the very tip of the top, that is, the top 1 percent." Follow-up research, published in 2014, by
Emmanuel 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 actually 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 being unable to account for 'mobility
of incomes'. At any given time, the Census Bureau ranks
all households by household income and then divides this distribution of households into
quintiles. The highest-ranked household in each quintile
provides the upper income limit for each quintile. Comparing changes in these upper income limits
for different quintiles is how changes are measured between one moment in time and the
next.
The problem with inferring income inequality
on this basis is that the census statistics provide only a snapshot of income distribution
in the U.S., at individual points in time. The statistics do not reflect the reality
that income for many households changes over time – i.e., incomes are mobile. For most people, income increases over time
as they move from their first, low-paying job in high school to a better-paying job
later in their lives. Also, some people lose income over time because
of business-cycle contractions, demotions, career changes, retirement, etc.
The implication of changing individual incomes
is that individual households do not remain in the same income quintiles over time. Thus, comparing different income quintiles
over time is like comparing apples to oranges, because it means comparing incomes of different
people at different stages in their earnings profile.Gary Burtless of the Brookings Institution
notes that many economists and analysts 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.New CBO income statistics
are beginning to 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. The income items missed by the Census Bureau
are increasing faster than the income items included in its money income measure.
What many observers miss, however, is the
success of the nation's tax and transfer systems in protecting low- and middle-income Americans
against the full effects of a depressed economy. 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%. As the CBO statistics demonstrate, incomes
in the middle and at the bottom of the distribution have fared better since 2000 than incomes
at the very top." === 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." === Demographic issues ===
Comparisons of income over time should adjust for changes in average age, family size, number
of breadwinners, and other characteristics of a population. 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 the income of the two households 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, becoming 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, And according to a 2004 analysis of income quintile data by
the Heritage Foundation, inequality becomes less when household income is adjusted for
size of household. 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 has appeared to decline
less than individual income in the twenty-first century because those who are no longer able
to afford their own housing have increasingly been moving in with relatives, creating larger
households with more income earners in them. The 2011 CBO study "Trends in the Distribution
of Household Income" mentioned in this article adjusts for household size so that its quintiles
contain an equal number of people, not an equal number of households. 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 CBO found income distribution over a multi-year period "modestly" more equal than annual income. 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), you find that income inequality, though less extreme than shown by the standard
measure, is also growing faster than shown by the standard measure.
=== Gini index === 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.) Gini index ratings can be used to compare
inequality within (by race, gender, employment) and between countries, before and after taxes. Different sources will often give different
gini values for the same country or population measured. For example, the U.S. Census Bureau's official
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).Professor Salvatore Babones of the
University of Sydney notes: 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. === Measuring inequality through consumption
vs. income === Conservative researchers have argued that
income inequality is not significant because consumption, rather than income should be
the measure of inequality, and inequality of consumption is less extreme than inequality
of income in the US.
Will Wilkinson of the libertarian Cato Institute
states that "the weight of the evidence shows that the run-up in consumption inequality
has been considerably less dramatic than the rise in income inequality," and consumption
is more important than income. According to Johnson, Smeeding, and Tory,
consumption inequality was actually lower in 2001 than it was in 1986. The debate is summarized in "The Hidden Prosperity
of the Poor" by journalist Thomas B. Edsall. Other studies have not found consumption inequality
less dramatic than household income inequality, and the CBO's study found consumption data
not "adequately" capturing "consumption by high-income households" as it does their income,
though it did agree that household consumption numbers show more equal distribution than
household income.Others dispute the importance of consumption over income, pointing out that
if middle and lower income are consuming more than they earn it is because they are saving
less or going deeper into debt.
A "growing body of work" suggests that income
inequality has been the driving factor in the 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. Economist Krugman has found a strong correlation
between inequality and household debt in the United States over the last hundred years. == Wealth inequality == Related to income inequality is the topic
of wealth inequality, which refers to the distribution of net worth (i.e., what is owned
minus what is owed) as opposed to annual income. Net worth is affected by movements in the
prices of assets, such as stocks, bonds, and real estate, which can fluctuate significantly
over the short-term. Income inequality also has a significant effect
over long-term shifts in wealth inequality, as income is accumulated. Wealth inequality is also highly concentrated
and 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 top 1% of wealth group
was approximately $8.4 million measured for the 2008–2010 period. Nearly half the top 1% group by income is
also represented in the top 1% group by wealth.The increase in wealth for the 1% was not homogeneous,
with much of the wealth gains in the top 0.1%. Those between the top 1 percent and top 0.5
percent have actually lost a significant share of wealth over the past 50 years.Further,
the top 400 Americans had net worth of $2 trillion in 2013, which was more than the
combined net worth of the bottom 50% of U.S.
Households. The average net worth of these 400 Americans
was $5 billion. The lower 50% of households held 3% of the
wealth in 1989 and 1% in 2013. The average net worth of the bottom 50% of
households in 2013 was approximately $11,000.This wealth inequality is apparent in the share
of assets held. In 2010, the top 5% wealthiest households
had approximately 72% of the financial wealth, while the bottom 80% of households had 5%. Financial wealth is measured as net worth
minus home values, meaning income-generating financial assets like stocks and bonds, plus
business equity.The Center for American Progress reported in September 2014 that: "The trends
in rising inequality are also striking when measured by wealth.
Among the top 20 percent of families by net
worth, average wealth increased by 120 percent between 1983 and 2010, while the middle 20
percent of families only saw their wealth increase by 13 percent, and the bottom fifth
of families, on average, saw debt exceed assets – in other words, negative net worth … Homeowners
in the bottom quintile of wealth lost an astounding 94 percent of their wealth between 2007 and
2010." == See also == == References == == Further reading == == External links ==
A Giant Statistical Round-up of the Income Inequality Crisis in 16 Charts from The Atlantic
Slate-Timothy Noah-The Great Divergence-Book Excerpts
Emmanuel Saez-Income and Wealth Inequality Presentation-October 2014
The Top 1 Percent: What Jobs Do They Have? (What percentage of what occupations are in
the top 1% income bracket) New York Times January 15, 2012
What Percent Are You? (Enter your household income and see how you
rank) New York Times January 14, 2012 Islands of High Income
Richard Wilkinson: How economic inequality harms societies. TED, Oct 2011. Five Economic Reforms Millennials Should Be
Fighting For. Rolling Stone, January 3, 2014.
Income Inequality in the United States: Hearing
Before the Joint Economic Committee, Congress of the United States, One Hundred Thirteenth
Congress, Second Session, January 16, 2014 "Wealth Gap" – A Guide (AP News – January
27, 2014). U.S. Census Bureau – Income, Poverty and Health
Insurance Coverage in the United States: 2013 Bloomberg-Quick Take-Income Inequality-Retrieved
December 2014 Can worker cooperatives alleviate income inequality? Al Jazeera America. January 13, 2015
Wolfers, Justin (March 2015). All You Need to Know About Income Inequality,
in One Comparison, The New York Times Economic Inequality: It's Far Worse Than You
Think. The great divide between our beliefs, our
ideals, and reality (April 2015), Scientific American
'Scandinavian Dream' is true fix for America's income inequality. Joseph Stiglitz for CNN Money, June 3, 2015. Hershey: U.S. Income Inequality Is Transforming
The Chocolate Business. Reuters via The Huffington Post, October 28,
2015. Stanford report shows that U.S. performs poorly
on poverty and inequality measures. Stanford News. February 2, 2016. Massive new data set suggests economic inequality
is about to get even worse. The Washington Post.
January 4, 2018. Michael Hiltzik (10 July 2018). "Employers will do almost anything to find
workers to fill jobs — except pay them more". Los Angeles Times. (with historical charts).