HOUSEHOLD INCOME: GROWING INEQUALITY

Here’s issue #4 of my Policy and Politics newsletter, written 11/13/11. One piece of the debate on how to reduce the deficit is whether the well-off should pay more. Here’s some context.

Household income in the United States has become significantly more unequal over the last 30 years. Income for wealthy households has grown faster than for others, and the wealthiest households, the 1% of households with the highest incomes, have experienced by far the greatest increases. The increases in incomes between 1979 and 2007, adjusted for inflation and taxes, are as follows: [1]

• The richest 1% of households had their average incomes increase by 275% – in other words they almost quadrupled. Their average annual wage income is $713,000 (not including income from investments). [2]
• The next 19% of the population with the highest incomes saw household incomes grow by 65%. Their annual incomes are now over $112,500.
• The 60% of households in the middle had their incomes grow by just under 40%. Their annual incomes are between $27,000 and $112,500.
• The poorest 20% experienced income growth of about 18%. Their annual incomes are under $27,000.

In summary, the 1% richest got much richer – the equivalent of a 5% raise on top of inflation every year. The middle got about a 1% raise each year on top of inflation and the poor got about a half of a percent raise each year.

As a result, the top 20% of households now has more income than the other 80% of households combined – 53% of the total income of all households. [3]  The top 1% receives 23.5% of total income, up from 8.9% in 1976. A similar pattern is evident in wealth: the top 1% now has 35% of the total wealth in America, up from 18% in the late 1970s. [4]

This is due to a variety of factors including:

• Growing executive compensation (CEOs now receive 300 times the typical workers’ wage, while in the 1970s it was 40 times)
• An increased share of income that is received from investments, including capital gains and dividends
• The equalizing effect of federal taxes is smaller
• The composition of government revenues shifted from progressive income taxes to unprogressive payroll taxes, sales taxes, and gambling revenue
• Federal benefit payments are doing less to even the income distribution due to growing amounts going to seniors that are without regard to income

The overall result is that the middle class does not have sufficient income and purchasing power to maintain its lifestyle and support full employment in theUSeconomy. And the poorest 20% of households struggle to survive on incomes of under $27,000.