The 30-Year Growth of Income Inequality

(Return to the Contents Topics page.)

Over the last 30 years, the top income tax rate has averaged about 40%.  It’s now at 35%, one-half of the 70% rate in effect throughout the 1970s.  It was even higher, at 90% in the 1950s and early 1960s, before being reduced to 70% in 1965.   As we discuss (Stable Income Inequality), these lower-than  maximum income tax rates were an instrumental factor, together with the other two pillars of Reaganomics [1], in greatly increasing income and wealth inequality, with disastrous consequences for the economy and for the bottom 99%.

Income Inequality levels track the top tax rate. 

Here again is the graph showing the top tax rate over time:

Notice that the top tax rate reductions from 1921 until 1931, the beginning of the Great Depression, closely resemble the reductions that began 30 years ago, in 1981.

The following graph [2] shows the percentage of total income going to the top 10% over the years: 

Just before the Great Depression, in 1928, the top 10% earned almost one-half of all income. For 40 years, roughly 1942-1982, the top 10% consistently took in about 33-34% of income (while the top income tax rate was at least 70%). This was the modern period of American prosperity.

As would be expected, the pattern is similar for the top 1%, as shown in the next graph:    

In 1928, the top 1% was taking in 23.9% of earnings.  With that degree of inequality, there was not enough income and wealth and available within the rest of the population (the bottom 99%) to sustain prosperity. In 1976, just before the Reagan Revolution, the top 1% was taking in 8.9%.

The top tax rate becomes too low to maintain stable income inequality.

With the lowering of the top income tax rate in 1981, the percentage of income of both the top 10% and the top 1% began to increase sharply, and by 1986 their shares of income were 40% and 15%, respectively.  At the beginning of the Clinton Administration, another sharp increase began, and the top 10% moved to over 47% by 1998 and the top 1% rose to 22%.  By 2007, the figure for the top 10% was back 50%, where it had peaked 80 years earlier.  And the top 1%, similarly, was back near the 1928 level, at 23.5%.

Note that “[t]he same pattern held for the richest one-tenth of 1% (representing about 13,000 households in 2007): Their share of total income also peaked in 1928 and 2007, at over 11%.”  [4]

So here was the situation in 2007:

                 Percentile                % of Total Income            

                 Top 0.1%                        11%        

                 Top 1 %                          23.5%

                 Top 10%                         50%

          Let’s reflect on these numbers:  The top 10% has as much income as everybody else; and one-half of what comes in to the top 10% goes to the top 1%.  And the income of the top 1% is heavily concentrated at the very top.

In effect there are increasingly two economies, a wealthy “top” economy doing very well, and a “bottom” economy for roughly the bottom 99% facing income stagnation, with dwindling wealth and resources.

Only the wealthy few have had income growth in the last 30 years.

This next graph [5] shows rapidly increasing income growth for the top 1% in the past ten years.  It also shows that for the entire bottom 60% there has been very little growth in per household income over the last 30 years, well under 1% annually.

Even the highest fifth (top 20%) has averaged less than what had previously been average GPA growth rate over the prior 40 years of a little over 3%.  And the bottom half of the top 20% did poorly, because the top 1% did so well that it raised the average for the top 20%. That means that over the past 30 years only people roughly within the top 10% were able to realize any growth in real income.

Robert Reich puts it this way:

The wages of the typical American hardly increased in the three decades leading up to the Crash of 2008, considering inflation.  In the 2002, they actually dropped. According to the Census Bureau, in 2007 a male worker earning the median male wage (that is, smack in the middle, with as many men earning more than he did as earning less) took home just over $45,000.  Considering inflation, this was less than the typical male worker earned thirty years before. * * * But the American economy was much larger in 2007 than it was 30 years before.  If those gains had been divided equally among Americans, the typical American would be more than 60 percent better off than he actually was by 2007. [6]

Since 2002, at the time of the GW Bush tax cuts for the top 2.5%, the top 1% has increased after tax income by more than 2.5x (unadjusted for inflation).  This fact is crucial, for it was devastating for the underlying economy, which could not sustain itself and collapsed in 2008.

As shown in this graph, within the top 10% the top 1% is taking in most of the growth.  From the mid-1990s to 2007, incomes in the lower half of the top 5% grew modestly, while the 5-10% range stayed about the same.  So, today, even the bottom half of the top 10% is not experiencing growth, and is barely holding on. [7]  Clearly, income and therefore wealth is being absorbed by the top 1% at a phenomenal rate.

As Reich pointed out, “[t]he American economy was much larger in 2007 than it was 30 years before.”  However, inequality has increased so much that the real, functioning economy for the bottom 99% – the one we all live and work in – is actually smaller, with less economic activity and real GDP than 30 years earlier.

It’s also important to remember that almost all of the growth in incomes over the last 30 years has gone to the top 1%, and its income has grown by 2.5x.  Moreover, almost half of the growth in the top 1% has accrued within the top .1% over the last 30 years. Within that group, therefore, income and wealth have grown astronomically, especially over the last ten years.

That said, it’s still difficult to imagine the degree of inequality concentration displayed in this graph [8]:

Incredibly, in 2000 and 2006, the average family incomes in the top 0.1% are far higher than in the rest of the top 1%, which more closely resembles the top 5%.  The top 0.01% has 6-7 times the average income of the rest of the top 0.1%, and more importantly, its income is growing about 3 times faster!

Overall growth has been suppressed, and the middle class has significantly declined over the past 30 years.

This graph [9] is revealing.  Before the last 30 years, the top 1% was increasing its income (unadjusted for inflation) by about 7% per year.  Everyone in the bottom 99%, however, was doing even better.  The lowest quintile was actually improving the fastest: Of course, the rich were rich and the poor were poor, but the economy was growing, and this was a period of great stability in the distribution of incomes.

Beginning with the Reagan Revolution, however, there is much lower annual economic growth overall.  Only the top 1% has maintained a growth rate over 1%.  The entire top 20% (which includes the top 1%), however, could barely keep up with inflation.

For the “middle class” as Robert Reich defines it (the middle three quintiles), real incomes in the last 30 years have declined.  What is functionally left of the middle class (people who still feel reasonably unaffected by economic decline) are somewhere in the top 10%, and as we noted earlier, mainly in the top 5%.

Robert Reich sums up this situation well:

Growth… is a means to better lives for all, generating not only higher incomes and possibilities for more personal consumption but also making room for the consumption of public improvements that benefit us all – and atmosphere less polluted by carbon, good schools, better health care.  Rapid growth also smooths the way toward the basic bargain: When the economy is growing nicely, the wealthy more easily accept a smaller share of the gains because they can still come out ahead of where they were before.  Simultaneously, when everyone else enjoys a larger share, they more willingly pay taxes to support public improvements.  It’s a virtuous cycle.

Slow or no growth has the reverse effect.  Economic gains are so meager that the wealthy fight harder to maintain their share.  The middle class, already burdened by high unemployment and flat or dropping wages, fights ever more furiously against any additional burdens, such as tax increases to support public schools or price increases resulting from regulations limiting carbon emissions.  It’s a vicious cycle. [10]

The question becomes how “to restore the widespread prosperity needed for growth, and how to get the growth necessary for widespread prosperity.” [11] It will certainly take great political will.  Government is currently mostly controlled by the forces of wealth devoted to increasing and exercising their power, and demonstrably dedicated to preventing that from happening.  And the American people are not yet geared up for the fight.

JMH – 4/2/11

 __________

[1] As we have noted, in addition to cutting taxes for the rich, Reaganomics seeks to reduce government regulation of business, and government social spending.  The former increases the distribution of wealth to the top, and the latter decreases the redistribution of wealth back down the income ladder.  These factors have a huge impact on wealth distribution.

[2] Numerous sources: See ataxingmatter.blogs.com http://ataxingmatter.blogs.com/tax/democratic_egalitarianism/

[3] Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” Quarterly Journal of Economics, 118(1), 2003. Updated to 2007 at http://emlab.berkeley.edu/users/saezFrom econfix.wordpress.com, extremeinquality.org

[4] Robert Reich, Aftershock: The Next economy and America’s Future, John Wiley & Sons, 2010, p. 20.

[5] Meanmesa.com

[6] From vagabondscholar.blogspot.com http://vagabondscholar.blogspot.com/2010/07/attack-of-plutocrats.html

[7] Aftershock, supra. at 19.

[8] Seekingalpha.com

[9] From iTulip.com http://www.itulip.com/incomedistribution.htm , where the conclusion is affirmed that “persistent inequality leads to lower economic growth.”

[10] Aftershock, supra. at 75-76.

[11] Ibid. 

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  16. Richard E Reed says:

    What can we do to mobilize the bottom 90% to do something about the disastrous effects of Reaganomics? The Republicans held out for not raising taxes on those earning over $250K and won. Jobs are not created by the rich. They are created by a large populace having purchasing power not based on credit. FDR understood this very well as he repeated often in his book, “Looking Forward.” The New Deal policies served us well until the Reagan era undid them.

  17. “I’ve gone ahead and bookmarked http://acivilamericandebate.wordpress.com/2011/04/10/the-30-year-growth-of-income-inequality/ at Digg.com so my friends can see it too. I simply used The 30-Year Growth of Income Inequality | as the entry title in my Digg.com bookmark, as I figured if it is good enough for you to title your blog post that, then you probably would like to see it bookmarked the same way

  18. Richard E Reed says:

    The need to DO something has been punctuated with a thousand !!!s by the current fiasco over raising the debt ceiling. Republicans held out for no new taxes on the rich and WON! When will the bottom 90% wake up?

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  25. Doesn’t make Reaganomics sound so grand after all.

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    • We’re overdue for a post that gives a more detailed explanation of how low taxes from the wealthy
      enable them to gather in a higher percentage of total wealth and increase their shares of incomes.
      This is coming soon, along with a discussion of “optimal inequality” – the inequality levels that are
      consistent with stable inequality and the taxation needed to support it. Thanks.

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  30. Waldo says:

    A lot of silliness here. Firstly, top tax rates do not at all capture what is important. When tax rates were 70% very few, if any, of the wealthy paid anywhere near that rate in taxes. If you believe how much the rich pay in taxes matters then you have to look at how much they pay and not just at the top marginal rate. A high marginal rate accompanied by all kinds of loopholes may result in the rich paying less than a system of lower rates and with fewer loopholes. Additionally, there is no data to support that taxing the wealthy helps folks in the lower brackets. Finally, the composition of the top 1% changes over time. Certainly over 50 years this must be true as most of the folks in the initial 1% would have passed away from one snapshot of income to the next.

    Overall, blaming the tax code on the changes that have been observed is quite a stretch. It is far more likely that there are other factors at work such as our lack of an adequate educational system for the poor that have much more of an impact.

    • Thanks, Waldo, for your thoughts. The actual tax rate after deductions is lower than the marginal rate, as you point out, but it is useful to determine the marginal rate at which inequality stability would exist. Revenues can be increased by raising the marginal rate or by closing loopholes (e.g., the Buffett Rule). The Cap.Gains rate has become the biggest “loophole” for the very rich, who are taxed the poverty level 15% rate for Cap. Gains. The precipitous loss of corporate tax revenues has also been a big factor in recent years.
      Certainly, as you suggest, it does matter how the government spends its tax revenues: To finance tax cuts for the rich with reduced programs for others (Medicare, Medicaid, S.S., unemployment ins., etc.), as the latest GOP budget proposal would do, shows how very much taxing the wealthy has been helping people in lower brackets. With high unemployment, additional revenue now could easily help create jobs.
      The really insidious thing, though, is that wealth keeps transferring to the top when taxes on the wealthy are too low, creating a vicious downward cycle for the folks in lower brackets. That’s why poverty is on the rise and education is declining.
      Thanks again.

    • Richard E Reed says:

      Tax codes do matter very significantly. The top marginal rate prevents salaries and bonuses in the tens of millions or more from greatly increasing the wealth of the very wealthy. Another highly significant tax code that leveled the playing field is the inheritance tax. This provision rolled back excessive gains for only the richest among us when passed on to their descendents.

      The New Deal of Roosevelt with its tax provisions caused a wealth disparity that existed in 1930 (and similar to today) to be normalized by the 1950s.

      Of equal importance, however, were new regulations that restricted excesses of the financial industry. Most of those restrictions have either been removed in the last 30 years or the industry has developed means to get around them.

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  33. ALEC needs to be destroyed or neutralized. Plain and simple. If such an organization existed on the left you would have people spending millions of dollars per year to fund an army of activists and trouble-makers to discredit it and destroy it.

  34. rick says:

    “In 1928, the top 1% was taking in 23.9% of earnings. With that degree of inequality, there was not enough income and wealth and available within the rest of the population (the bottom 99%) to sustain prosperity.”

    I have to take issue with this comment. The US economy is not a pie to be divided equally. If a person has a salaried job of $50,000 a year, he can start a lawn business (one of thousands of small business opportunities) and add an extra income for his family. Yes, it will take work, and take up time that could have been spent in front of a TV or on Facebook, but that is what the American Dream is all about. It is about the “Opportunity” to start a business, add an employee or two, and then a few more, and before long, the guy making $50,000 is making $250,000 and giving an income to 12 other people. Each of those people have the “opportunity” to develop their lawn mowing skills and start their own business.

    I am a wedding and portrait photographer in the Dallas and Fort Worth area. Many new amateur photographers are coming out of nowhere and calling themselves a “professional photographer”. The reasons are; technology has make it easier to become a decent photographer, and more people see photography as a way to make some extra income. The full-time professional photographers are closing their studios and getting jobs elsewhere as the part-timers increase like gerbils. However, the business skills they have learned from decades of entrepreneurship will help them in whatever business they join,

    Some will start new businesses. I have. I’ve done it before, and don’t fear starting a new business again. My gripe is with those who think taxpayers owe them something. As President Kennedy said, “Don’t ask what your country can do for you. But, ask what you can do for your country.”

    • I hate to break it to you, Rick, but the American Dream has become a fantasy for young people today; their employment opportunities and incomes are fading. The United States has higher inequality than all of the other industrially developed nations in the world, so people in all the other countries have a better chance of realizing their dreams than Americans do. We’re in a depression, and if your friends in Congress continue to cut government spending and destroy the economic safety net, while cutting taxes even more on top 0.01%, 0.1% and 1% incomes, we’ll be in another Great Depression. At that point, sir, your business, too, will decline and probably fail. JMH

  35. rick says:

    Let me add that it is time to quit blaming others for your lack of success. If you live in the US, you can’t blame the another race for your lack of success. There are many blacks and hispanics who have started in poverty, and succeeded into the top 1%. You can’t blame the Republicans or the Democrats either. No political party can keep you from success. The top 1% is filled with people from both parties. Your lack of education can’t keep you from success. Bill Gates, Michael Dell and numerous others don’t have a college degree.

    You have 168 hours in this week. How will you invest your time with those 168 hours? Entertainment and leisure, or reading a self-help book or other positive investment of your time? Will you help your needy neighbor, or waste your money on yet one more lottery ticket.

    • Some succeed, certainly. But blacks, on average, have only about 5% as much wealth as whites. People (especially women) that do have college degrees, are not doing that well today. The income of the median woman with a college degree is below the poverty threshold for a household off 8 (w/six below the age of 18). We’re in a depression, and we can blame our political parties (and the rich people that control them) for that.

    • Richard E Reed says:

      The problem with your proposition is a matter of numbers. An individual gardening for a living takes in about $50 for an hour spent including driving time. This means he needs between 8 and 12 clients a day. If he works 6 days a week, as most do, he needs 48 to 72 clients a week. That’s a population of an average of 240. If only 1/3 of the homes can or will hire a gardener that means people needed per gardener is about 720. In a town of 7200 population there can only be 10 gardeners. The point is, one gardener with 10 employees will service that town and there is no room for another. There will always be a majority of the population with no ability or room to rise to the top, And with 80% of America’s wealth concentrated in the hands of a few at the top there is little opportunity for most of that bottom 90% to rise much. Through his policies Roosevelt corrected that excessive imbalance so that by the 1950s opportunity was within reach of most. However, Reaganomics, with a policy of enriching the already rich with the hope it would trickle down to the rest returned us to the economic imbalance we faced just prior to the depression.

  36. This is an awesome post. I love your approach to addressing this serious problem, and you’re totally correct.

    To address a previous comment, effective rates, as in what the rich actually paid, were still easily 50-60 percent, over twice as high as it is today. Look at the Tax Policy Center figures, or the Tax Foundation. These sources will give you what you need to see regarding these effective rates.

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  38. alex says:

    I beg you to watch:

    along with all the videos on http://www.learnliberty.org/

    • I watched it, thanks. It’s a nice presentation, unfortunately, it’s inaccurate in several respects. Real incomes of the bottom 40% have gone down over 30 years. The pizza example is wishful thinking. Economic growth slowed when income inequality started to grow. The pie grew, sure, but per capita GDP did not, not by much. The error is in including the top 1% in the computation. The top 1% has gotten and increasing share of growth, and is now getting 93% of all new income. Look around — if the bottom 80% is doing better in real terms, why are their incomes unable to support (through taxes) the schools and public workers they could with ease 15 years ago? The truth is the middle class has been bled for 30 years and is now vanishing.
      I have to believe that you will dismiss what I am saying out of hand. I offer you is this thought: The economy can’t grow (or even survive) without demand, and for demand there must be income. When the rich keep all their excess profits, the economy goes into a deep freeze, which is where we are now. Sorry about that, but we can’t recover without funding from the rich.
      Thanks for checking in.

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