America’s growing income inequality

WTF widening income inequality hp 10.31.11

The latest Congressional Budget Office report presented startling numbers on the widening income gap between the top 1% of Americans and the rest of the population.

GRAPHIC SOURCE: cbo.gov

The CBO found that the top 1% of Americans saw their after-tax household income nearly triple – increasing by 275% – between 1979 and 2007. Consequently, the top 1% accounted for more than 20% of the total income in the United States in 2007 compared to just 10% in 1979. Meanwhile, the after-tax income growth for the lowest quintile (bottom 20% of the income population) was only 18% between 1979 and 2007. Overall, the bottom 80% of the population saw their share of total income decline during that period.

“As a result of that uneven income growth, the distribution of after-tax household income in the United States was substantially more unequal in 2007 than in 2009,” according to the report, “Trends in the Distribution of Household Income Between 1979 and 2007.”

The key factors driving the income inequality include policy changes that have diminished the equalizing effects of federal taxes and government transfers (such as cash or other in-kind benefits for low-income households) and shifts in wage distributions that have favored “superstars,” top corporate executives, and higher-skilled and educated workers.

Changes in Federal Tax Policies

“Tax rates for the highest-income households declined after 2000. The decline was especially rapid in 2003, when a reduction in the tax rate for the top bracket enacted in 2001 took effect and further changes in law reduced tax rates on dividends and realized capital gains.” (CBO report, page 27)

Priority Changes in Government Transfers

“The distribution of transfers shifted, however, moving away from households in the lower part of the income scale. In 1979, households in the bottom quintile received more than 50 percent of transfer payments. In 2007, similar households received about 35 percent of transfers. That shift reflected the growth in spending for programs focused on the elderly population (such as Social Security and medicare), in which benefits are not limited to low-income households.” (CBO report, summary page 7)

Rise in Income for the Top 1%

Superstars

“One potential explanation is that the compensation of ‘superstars’ (such as actors, athletes, and musicians) may be especially sensitive to technological changes. Unique characteristics of that labor market mean that technical innovations, such as cheap mass media, have made it possible for entertainers to reach much wider audiences. That increased exposure, in turn, has led to a manyfold increase in income for such people.” (CBO report, page 18)

Corporate Executives

“As firms grow larger and more complex, the impact on profits of corporate executives’ decisions becomes greater, so firms may be more willing to pay large salaries to attract and keep the best executives.” (CBO report, page 18)

Higher-skilled & Educated Workers

“The technological changes of the past several decades – and perhaps the entire past century – increased employers’ demand for workers with higher skills and more education. That increase, along with smaller increase in the supply of workers with higher skills and more education, generated substantial gains in the relative wages of more-educated workers.” (CBO report, page 13)

The Hill Poll: 3/4 of Likely Voters Say Income Inequality is a Problem 

polling survey released by The Hill today showed that 74% of likely voters agree that income inequality is a problem, 68% say the current income tax system is unfair, and 67% believe the American middle-class is shrinking.

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