April 7, 2011

The Rich and the Rest of Us

     Americans seem to have a grossly incorrect idea of how unequal the US actually is in incomes and wealth. (Income is what you earn each year; wealth is what you own.) See this online article from Mother Jones.
      One measure of income inequality is what’s called the Gini Index. The data in the map below come from a well-known liberal-biased source — the CIA:

What the Gini Index tells us is that the US has among the most unequal income distributions in the world. Oh, we’re better off than Brazil or South Africa. But we have much more income inequality than Canada, Britain, Australia, France, India, Sweden, Japan, Poland, Italy. We are about the same as China or Argentina. Make you feel better?
      Are we improving over time?  Historical Gini data show a gradual but steady improvement in the US from 1929 to 1968, when the US Gini reached its lowest point -- that is, incomes were most equal.
      It's hard to tell about more recent trends from the Gini Index, because the basis of calculation was changed in 1992. We showed no significant change 2000-2009.  However, there is this undisputed fact: Of all the income gains in the US from 1980-2008 (a whole generation!), 96% of the income gains went to the top 10% of the population, leaving 4% for the other 90% of the people.  This is after the distribution of incomes held pretty steady from 1950-1980. See my post of March 17 for details.
      What about wealth? Data from E.M. Wolf, Recent Trends in Household Wealth in the United States (Levy Economics Institute, 2010) show this:

It shouldn’t be a big surprise that when incomes stay unequal for a long time, those getting the big incomes end up with most of the wealth. But this is way out of balance, because we have let incomes get way out of balance in the US.
      There are two forces making this even worse:

1. In the US, we primarily tax incomes rather than wealth. Only real estate taxes and inheritance taxes are taxes on accumulated wealth. For a generation now, Republicans have been pressing to eliminate the “death tax” — their absurd name for inheritance taxes. They claim falsely that this tax hurts families that run small business or farms, but in fact only about 1% of such families ever pay inheritance tax. They have succeeded in lowering Federal inheritance taxes from 70% in 1980 to 35% in 2011.  And consider this: At present we only impose Federal tax on estates over $5 milllion, so this is not hurting little folks. As we lower inheritance tax rates, the rich get to keep more of their accumulated wealth.

2. Unless you’re very rich, the odds are that most of your accumulated wealth is tied up in your home. The top 1% have about 10% of their wealth in their homes, whereas the average family— if it has any wealth at all, many have none — has about 65% of it in a home.  (The data are here.) This means that the slump in house values 2006-2011 is destroying average families’ wealth much more than the wealth of the rich. Furthermore, as Federal aid to localities goes down, cities and towns depend more on real estate taxes — which disproportionately impact the average family.

These unequal distributions of incomes and wealth in the US are not just matters for envy, they are adversely affecting many aspects of our lives. More to come.

Lew Jacobson