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Record U.S. Income Gap Widening Again

July 10, 2010

In June, an analysis from the Center on Budget and Policy Priorities confirmed that gap between rich and poor in the United States reached levels not seen since 1929. Between 1979 and 2007, the yawning chasm separating the after-tax income of the richest 1 percent of Americans from the middle and poorest fifths of the country more than tripled. But while the Bush recession which began in December 2007 temporarily halted the stratospheric advance of the wealthy, the rich - and the rich alone - have largely recovered their losses. Which means that the record level of income inequality in America is growing once again.
The CBPP report found a financial Grand Canyon separating the very rich from everyone else. Over the three decades ending in 2007, the top 1 percent's share of the nation's total after-tax household income more than doubled, from 7.5 percent to 17.1 percent. During that time, the share of the middle 60% of Americans dropped from 51.1 percent to 43.5 percent; the bottom four-fifths declined from 58 percent to 48 percent. As for the poor, they fell further and further behind, with the lowest quintile's income share sliding to just 4.9%. Expressed in dollar terms, the income gap is staggering:

Between 1979 and 2007, average after-tax incomes for the top 1 percent rose by 281 percent after adjusting for inflation -- an increase in income of $973,100 per household -- compared to increases of 25 percent ($11,200 per household) for the middle fifth of households and 16 percent ($2,400 per household) for the bottom fifth.

To be sure, the deficit-exploding Bush tax cuts played an essential role in fueling the gap. (This is evidenced by the fact that between 2001 and 2007, the income share of the 400 richest American taxpayers doubled even as their tax rates were halved.) As the New York Times revealed in October, by 2007 the top 1% - the 1.5 million families earning more than $400,000 - reaped 24% of the nation's income. The bottom 90% - the 136 million families below $110,000 - accounted for just 50%.

But with the devastating Bush recession, the upper class joy ride hit a speed bump. As the media last fall lamented the downturn's impact on the tragically rich, David Leonhardt and Geraldine Fabrikant of the New York Times concluded concluded, "After a 30-year run, [the] rise of the super-rich hits a sobering wall."

They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. The recent news about resurgent Wall Street pay has seemed to suggest that not even the Great Recession could reverse the rise in income inequality.
But economists say -- and data is beginning to show -- that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.

As it turned out, that time wasn't just soon. It's already here.
The Los Angeles Times announced the return of record-setting income inequality last month in an article titled, "Millionaires Make a Comeback." After getting pummeled as Wall Street plummeted in 2008, the rich have begun to recoup their losses. The short period of Gilded Interrupted is over:

In 2008, as the financial crisis raged, the stock market hit bottom and the Great Recession ate into the economy, the number of millionaires in the United States plunged.
But last year the number of millionaires bounced up sharply, new data show.
And after that decline and rebound, the millionaire class held a larger percentage of the country's wealth than it did in 2007.
"It's been a recession where everyone took a hit -- with the bottom taking a bigger hit," said Timothy Smeeding, a University of Wisconsin professor who studies economic inequality. But "the wealthy alone have bounced back."

Bounced back, it turns out, with a vengeance. The Boston Consulting Group found that "the number of U.S. households with at least $1 million in "bankable" assets climbed 15% last year to 4.7 million after tumbling 21% in 2008." Despite there being 10% fewer millionaires than in 2007, the percentage of Americans' total wealth held by those households was slightly higher, growing to 55%.
Writing in the Washington Post, Ezra Klein neatly summed up the dynamic which has restored income inequality to record highs:

The basic story here is that assets have recovered so much more quickly than the broader economy that in 2009, "the millionaire class held a larger percentage of the country's wealth than it did in 2007." In other words, inequality has actually gotten worse. If you want to see why that's unexpected, check out the chart I cadged from the Center for Budget and Policy Priorities: After the Great Depression, inequality fell and didn't recover until 2007. That's about 80 years. After the Great Recession, inequality fell and didn't recover until ... 2009? That's one year.

For his part, Larry Mishel of the Economic Policy Institute argued, "The recession is going to end up accentuating the inequalities of income and wealth we've seen for 30 years," adding, "This requires attention if we're going to see robust wealth growth going forward."
Which is exactly right. Sadly, Republican obstructionists in Washington are only paying attention to those who need it least. Before they united to block the extension of unemployment benefits to the long-term jobless, Republicans delivered a one-year suspension of the estate tax. And even as that gambit drains billions from the U.S. Treasury to produce a one-year windfall for the heirs of the richest Americans, the GOP and its Tea Party shock troops insist on making the expiring Bush tax cuts for the wealthy permanent.
As the numbers on income inequality clearly show, only one side is fighting the class war in America. It should come as no surprise that they are winning it.

10 comments on “Record U.S. Income Gap Widening Again”

  1. Perhaps the most stunning stat on how our contemporary class war is going:
    In 2007, the latest year with IRS stats available, America's 400 highest-earning taxpayers collected an average $344.8 million each in income. They paid 16.6 percent of that, after exploiting all the loopholes they could find, in federal income taxes.
    In 1955, the top 400 collected on average, in 2007 inflation-adjusted dollars, just $12.8 million. They paid, after exploiting all available loopholes, 51.2 percent of that in taxes.

  2. a few criticisms:
    looking at your graphs, it appears that wealth has grown for all, but much more so for the richest. what's so immoral about this? investment money that fuels growth comes mainly from the upper class to begin with. it's not like the rich are getting richer at the poor's expense- the poor are getting richer too, thanks to aggregate growth.
    also, for objectivity's sake, you should address the percentage of taxes paid by the upper class when you address the percentage of income that goes to that class. is it proportional to the distribution of income?
    also, you wail about the deficit, but what accounts for a majority of the spending are lower and middle-class entitlements. how much of the tax revenue comes straight from the rich?
    these omissions, if purposeful, make this whole argument seem less than honest. show the whole picture, don't pull a breitbart.

  3. From the article:
    "Before they united to block the extension of unemployment benefits to the long-term jobless, Republicans delivered a one-year suspension of the estate tax."
    Sorry, but how do Republicans - who have only 40 votes in the Senate - "deliver" anything? If the estate tax was suspended for a year, wouldn't that require the cooperation of some Democrats, as well? Along with the cooperation of a Democratic President, and a House of Representatives controlled by Democrats?

  4. Will Riker, a couple of points.
    A lot of the people in the top few % are in élite professions like medicine and law. These professions enjoy extraordinarily high salaries in the United States as compared to anywhere else in the world. This is not the result of market forces, but of quite deliberate government policies designed to favor them.
    For example, an American GP typically pulls down twice as much as an Australian does. Is the marginal contribution of an American doctor twice as much as that of an Australian doctor? I don't think anybody believes that. Is America's economy so much bigger, in proportion to population, that the salaries get dragged up? No. (US GDP per capita is about 18% higher.)
    Really, it's because the supply of doctors in the US is more restricted than in Australia. And that in turn is because the medical boards and the state legislatures have colluded to make it so. It's not the free market rewarding the most productive members of society; it's crony capitalists driving up their own incomes at the expense of the general welfare. (An even more obvious rip-off is the unnecessarily high rates of Medicare reimbursement. With essentially all doctors willing to take medicare patients, and students crawling all over each other to get admitted to medical schools, why not slash payments? And yet Congress passes the Doc Fix over and over and over...)
    So, yes, many of the rich really are getting richer at the expense of the general public.
    But what about your point that lower-class folks are at least seeing modest gains? After all, their line on the graph is going up still, by around 20%...
    ...and it so co-incides that total hours worked per American have increased by about the same proportion. In other words, lower and middle class incomes have increased because people are working more, but wages are stagnant or even declining for large swathes of the income distribution.
    Finally, the idea that somehow pointing out worrying changes in the income distribution, without including a bunch of other stuff about tax rates and cutting social security is equivalent to Breitbartian propaganda is too ridiculous to engage.

  5. Riker: You're arguing that the contribution of capital to the economy has gone up by 281% over the last three decades, while the value of labor (middle income earners and below) has gone up 16-25%. You'll need to explain the macroeconomics behind this disparity, because I find it absurd.
    Yes, Number One, let's focus not on the fact that 1% of the population earns nearly 20% of the income, but that they are unjustly forced to pay 40% of the taxes. Any clear-headed person would take that deal in a heartbeat.
    Steve: By filibustering the opposition's legislation until their pet provisions are included.

  6. " but that they are unjustly forced to pay 40% of the taxes."
    Now, that is funny logic for you.
    First, you are alluding to federal income taxes, NOT all taxes. Believe it or not, there is a big difference.
    Second, to be "unjust", the proportion wealthy people pay would have to be much higher than the share of the country's total income they're collecting.
    It is not! When considering all of “this nation's taxes” including payroll, state and local levies, the top 5 percent pay just 38.5 percent of the taxes.
    And, what is their share of the total income? 36.5% as per the Government Accountability Office (data from 2007)
    Nice try though!
    Better luck next time.

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Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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