Tax Analysts Blog

Time for a Little Class Warfare?

Posted on Oct 26, 2011

The evidence is overwhelming that America's rich are getting much richer while income growth for low- and middle-income earners has stagnated. The share of income and wealth concentrated in the hands of America's superrich is high by both historical and international standards. These facts are hardly breaking news. But they take on new significance in light of the recent political developments that stress economic inequality. They include President Obama's articulation of the "Buffett rule" as a guiding principle of tax policy, Senate Democrats' failed push for a 5.6 percent millionaire's surtax, the Occupy Wall Street movement, and the frenzy over Republican presidential candidate Herman Cain's proposal for a system that taxes only consumption and wages.

We start off with the table below that makes a simple but striking point. As the U.S economy has grown over the last three decades, the superrich have gotten most of the benefit. The first column corresponds to what we hear on the news all the time: the growth of the overall economy. The information in the last three columns, however, rarely makes it to prime time. Yes, the American economy grows. But more than half of the benefits of that growth accrue to 1 percent of the population. Please note that if everybody benefited equally from growth, the top 1 percent would capture 1 percent of the growth. The actual number is 58 percent!


Who Has Benefited From Economic Growth?

Table 1.pdf

 Source: Anthony Atkinson, Thomas Piketty, and Emmanuel Saez, "Top Incomes in
 the Long Run of History," Journal of Economic Literature, 49(1), 2011, 3-71,
 Table 1.

Forget that these data are fuel for the fire of starry-eyed left-wing politicians. Any realist who wants to assess the modern political economy must understand that income distribution is increasingly skewed to the wealthy. You may not like class warfare. You may consider it un-American. But given these facts, nobody should be surprised that the redistribution of wealth is an issue of growing prominence in American politics. Actually, what is puzzling is why it has been dormant for so long.

The following pages are filled with charts from a variety of sources that further demonstrate the increasing lack of balance in the U.S. economy.

Figure 1 shows that average income adjusted for inflation has grown at a healthy clip, from $50,800 to $67,500 between 1975 and 2010. This reflects overall economic growth. But for the median household (the household with the same percent of the population above and below it), growth has been anemic -- a raise of less than $6,000 over 35 years. How does this happen? Answer: Most economic growth benefits upper-income households.

Figure 2 shows that the share of income accruing to the top 10 percent has grown from 30.5 percent to 42 percent between 1979 and 2007. The growth for the top 1 percent has been even more striking. It has more than doubled -- from 9.3 percent to 19.4 percent -- from 1979 to 2007.

Figure 3 turns up the magnification and focuses on the top one-tenth of 1 percent of incomes. In this case, the share of income accrued has nearly quadrupled -- from 2 percent to 7.8 percent -- between 1975 and 2008.


Figure 1. Median and Mean Household Income in the
United State, 1975-2010 (2010 dollars)

Figure 1.pdf

Source: U.S. Census Bureau, Income, Households, Table H-6, "Regions by Median and Income," available at http://www.census.gov/hhes/www/income/data/historical/household/index.html.

Figure 2. Shares of Total Pretax Income Earned by
Top Income Categories, 1979-2007

Figure 2.pdf

Source: Congressional Budget Office, "Average Federal Tax Rates and Income, by Income Category (1979-2007)," available at http://www.cbo.gov/publications/collections/collections.cfm?collect=13.

Figure 3. Share of Pretax Income Earned by
Top 0.1 Percent of Incomes, 1975-2008

Figure 3.pdf

Source: Thomas Piketty and Emmanuel Saez, "Income Inequality in the United States, 1913-1998," Quarterly Journal of Economics, 2003, 1-39. In July 2010 tables and figures were updated to 2008, available at http://elsa.berkeley.edu/~saez/.

Figure 4. Share of Total AGI Reported on
Top 400 Income Tax Returns, 1992-2006

Figure 4.pdf

Source: IRS Statistics of Income division, "The 400 Individual Income Tax Returns Reporting the Highest Adjusted Gross Incomes Each Year, 1992-2006," available at http://www.irs.gov/pub/irs-soi/06intop400.pdf.

Figure 5. Forbes 400 Share of total
U.S. Wealth, 1983-2006

Figure 5.pdf

Source: Thomas Piketty and Emmanuel Saez, "Income Inequality in the United States, 1913-1998," Quarterly Journal of Economics, 2003, 1-39. In July 2010 tables and figures were updated to 2008, available at http://elsa.berkeley.edu/~saez/.

Figure 6. Poverty Rate for U.S. Families, 1975-2010

Figure 6.pdf

Source: U.S. Census Bureau, Historical Poverty Tables, Families, Table 4, "Poverty Status of Families," available at http://www.census.gov/hhes/www/poverty/data/historical/families.html.

Figure 7. Share of Total Pretax Income Earned by
Bottom 40 Percent of Incomes, 1979-2007

Figure 7.pdf

Source: Congressional Budget Office, "Average Federal Tax Rates and Income, by Income Category (1979-2007)," available at http://www.cbo.gov/publications/collections/collections.cfm?collect=13.

Figure 8. International Comparison of Income
Shares of Top 1 Percent of Incomes

Figure 8.pdf

Source: Anthony Atkinson, Thomas Piketty, and Emmanuel Saez, "Top Incomes in the Long Run of History," Journal of Economic Literature, 49(1), 2011, 3-71, Table 6.

Figure 4 reports on tax return data of the top 400 individual income taxpayers from 1992 to 2006. Swings in capital gains greatly affect the share of that income accrued by this group. In 1992 its share was 0.52 percent of total income. In 2006 it was 1.31 percent.

Figure 5 looks at accumulated wealth instead of the flow of income. In 1983 the richest 400 Americans as identified by Forbes magazine owned an estimated 1.2 percent of the nation's wealth. By 2006 that percentage had grown to 3.2 percent.

Figure 6 looks at the other end of the spectrum -- the poverty rate for U.S. families. During the 1990s, substantial progress was made in reducing the poverty rate. But after the millennium, those gains were wiped out. The U.S. poverty rate for families in 2010 was 11.7 percent.

Figure 7 shows that in 1979, the 40 percent of households with the lowest income accrued 16.9 percent of total income. By 2007 their share had dropped to 12.4 percent.

Figure 8 summarizes some academic research comparing the distribution of income in major countries. These comparisons should not be taken as gospel, given the differences in years from which the data were collected and the extreme difficulty in tabulating this type of data. Nevertheless, these comparisons indicate that the United States is a country where the distribution of income is more uneven than most.

Yes, after decades of lurking in the background, the issue of income distribution has burst like a thunderbolt onto the center stage of American politics. Even though it is plainly a matter of economics, the role of economists in the debate is limited. Economics cannot tell what income distribution is correct or best. That is a matter of personal belief. We all get to have our own opinion. Economics plays only a supporting role. Economists can provide facts about income and wealth distribution. It turns out that these facts, no matter how you slice them, point to startling changes in our economy that you will miss entirely if you look only at the usual economic indicators routinely reported in the press.

Read Comments (1)

P BrandtAug 13, 2012

Do you have a table that shows clearly the income by band along with effective
rate and absolute amount of tax burden paid by each band. It would also help to
see tax at local and state level included. There is a lot of debate out there
that since the 1% pay the majority of taxes, they should get their way. I have
heard this for decades from people I know. It would be great to see this
information rolled up into one chart.

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