Income-Inequality Gap Widens

thoughtone

Rising Star
Registered
source: The Wall Street Journal.com

Boom in Financial Markets
Parallels Rise in Share
For Wealthiest Americans
By GREG IP
October 12, 2007; Page A2

The richest Americans' share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fueling anxiety among American workers.

The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.

The IRS data, based on a large sample of tax returns, are for "adjusted gross income," which is income after some deductions, such as for alimony and contributions to individual retirement accounts. While dated, many scholars prefer it to timelier data from other agencies because it provides details of the very richest -- for example, the top 0.1% and the top 1%, not just the top 10% -- and includes capital gains, an important, though volatile, source of income for the affluent.

The IRS data go back only to 1986, but academic research suggests the rich last had this high a share of total income in the 1920s.

Scholars attribute rising inequality to several factors, including technological change that favors those with more skills, and globalization and advances in communications that enlarge the rewards available to "superstar" performers whether in business, sports or entertainment

In an interview yesterday with The Wall Street Journal, President Bush said, "First of all, our society has had income inequality for a long time. Secondly, skills gaps yield income gaps. And what needs to be done about the inequality of income is to make sure people have got good education, starting with young kids. That's why No Child Left Behind is such an important component of making sure that America is competitive in the 21st century." (See article.)

Jason Furman, a scholar at the Brookings Institution and an adviser to Democratic politicians, said: "We've had a 30-year trend of increasing inequality. There was an artificial reduction in that trend following the bursting of the stock-market bubble in 2000."

The IRS data don't identify the source of increased income for the affluent, but the boom on Wall Street has likely played a part, just as the last stock boom fueled the late-1990s surge. Until this summer, soaring stock prices and buoyant credit markets had produced spectacular payouts for private-equity and hedge-fund managers, and investment bankers.

One study by University of Chicago academics Steven Kaplan and Joshua Rauh concludes that in 2004 there were more than twice as many such Wall Street professionals in the top 0.5% of all earners as there are executives from nonfinancial companies.

Mr. Rauh said "it's hard to escape the notion" that the rising share of income going to the very richest is, in part, "a Wall Street, financial industry-based story." The study shows that the highest-earning hedge-fund manager earned double in 2005 what the top earner made in 2003, and top 25 hedge-fund managers earned more in 2004 than the chief executives of all the companies in the Standard & Poor's 500-stock index, combined. It also shows profits per equity partner at the top 100 law firms doubling between 1994 and 2004, to over $1 million in 2004 dollars.

The data highlight the political challenge facing Mr. Bush and the Republican contenders for president. They have sought to play up the strength of the economy since 2003 and low unemployment, and the role of Mr. Bush's tax cuts in both. But many Americans think the economy is in or near a recession. The IRS data show that the median tax filer's income -- half earn less than the median, half earn more -- fell 2% between 2000 and 2005 when adjusted for inflation, to $30,881. At the same time, the income level for the tax filer just inside the top 1% grew 3%, to $364,657.

Democrats, on the other hand, have sought to exploit angst about stagnant middle-class wages and eroding benefits in showdowns with Mr. Bush over issues such as health insurance and trade.
 
The Republican Revolution put wealth and power squarely in the hands of the rich. Where Clinton rented the Lincoln bedroom, Republicans let Big Business write their own laws. Bush gave 1.5 trillion in tax cuts to people who already control 20% of the wealth. Now we have food recalls every week, lead in toys, bridges collapsing and American cities being washed away, what do people get upset about? Mick Vick dog fighting or Paris Hilton doing time. Rich people have always felt they should be in power because the public is too dumb to govern but I think this time they have gone too far.
 
This information combined with the Forbes 400 list...

I get the impression,

the richest 400 Americans (excluding Oprah Winfrey)

EQUALS

the entire economic output of 40 million African Americans in this country.

Who says there is no racism?
 
Maybe we should forget what we heard, think outside the box, see things for what they are. America is a place where you can work hard, get an education, make the right connections and prosper but true wealth and power is where it's always been. There are families so rich and power like the Astors, Duponts, people don't mention their names let alone put them on a Richest List. The idea of fair competition is a myth, so is that 'pulling one's self up by the bootstraps ' bull. I mean who does Bill Gates compete with? Does Google have competition or is there just enough players in the game to give the appearance of competition. Of course as the population and economy grows more people are let in on the game if not we would have riots. But the reality is 400 people control more wealth than Blacks and Latinos combined. It's like that from the city to the global level there is just enough serious companies to handle the business everybody else fights for the crumbs. Fortunately in a economy as rich as ours you can live a very good life off the crumbs.
 
America Has a Highly Progressive Tax System

America Has a Highly Progressive Tax System
The top income earners now shoulder far more of the federal tax burden than they did in the early 1980s.
By Duncan Currie
Friday, October 24, 2008

Any discussion of reforming America’s federal tax system should begin with the recognition that it is already highly progressive. According to the latest Internal Revenue Service (IRS) data, the top 1 percent of income earners paid nearly 40 percent of federal individual income taxes in 2006, compared to roughly 19 percent in 1980. Between 1980 and 2006, the share of federal income taxes paid by the top 5 percent jumped from under 37 percent to over 60 percent. During that same period, the share paid by the top 10 percent went from around 49 percent to almost 71 percent.

To be sure, the share of income earned by the top groups has also increased substantially. The IRS says that in 1980, the top 1 percent of income earners collected less than 8.5 percent of all adjusted gross income (AGI), compared to more than 22 percent in 2006. Between 1980 and 2006, the share of AGI earned by the top 5 percent grew from about 21 percent to nearly 37 percent. During that same period, the share earned by the top 10 percent swelled from roughly 32 percent to over 47 percent.

But when we compare the figures for 2006, it is clear that the percentage of federal income taxes paid by the top earners was considerably higher than the percentage of AGI they received. For the top 1 percent, the difference was almost 18 percentage points. For both the top 5 percent and the top 10 percent, the difference was nearly 23.5 percentage points. For each of these groups, the difference between percentage of federal income taxes paid and percentage of AGI earned grew significantly larger between 1980 and 2006.

The most recent Congressional Budget Office (CBO) statistics contain further evidence of the tax system’s progressivity. The CBO reports that in 2005, a net total of 2.9 percent of federal individual income tax revenues were transferred to the lowest quintile of income earners, and a net total of 0.9 percent of those revenues were transferred to the second lowest quintile. There’s no question that the Social Security payroll tax is regressive. But even when all federal taxes—including individual income taxes, social insurance taxes, corporate income taxes, and excise taxes—are accounted for, the top quintile still bears a disproportionately large share of the burden.

Consider the CBO data. In 2005, the lowest quintile of income earners paid only 0.8 percent of all federal taxes but earned 4.8 percent of after-tax income. The second lowest quintile paid 4.1 percent but earned 9.6 percent. The middle quintile paid 9.3 percent but earned 14.4 percent. The fourth quintile paid 16.9 percent but earned 20.6 percent.

Meanwhile, the highest quintile paid 68.7 percent of all federal taxes but earned only 51.6 percent of after-tax income, a difference of 17.1 percentage points. For the top 10 percent of income earners, the difference between percentage of federal taxes paid and percentage of after-tax income earned was 17.3 percentage points. For the top 5 percent, the difference was 16 percentage points. For the top 1 percent, it was 12 percentage points.

How has the federal tax burden shifted over time? The CBO finds that between 1981 and 2005, the share of all federal taxes paid by the second lowest quintile dropped by 2.7 percentage points, the share paid by the middle quintile dropped by 3.7 percentage points, and the share paid by the fourth quintile dropped by 4.9 percentage points.

During that same period, the share paid by the top quintile increased by 12.3 percentage points, the share paid by the top 10 percent increased by 15.1 percentage points, the share paid by the top 5 percent increased by 15.8 percentage points, and the share paid by the top 1 percent increased by 14.5 percentage points.

What about George W. Bush’s tax cuts? The CBO estimates that in 2005, the share of all federal taxes paid by the top quintile was 2 percentage points higher than it had been in 2000 (Bill Clinton’s last full year in the White House). Between 2000 and 2005, the share of all federal taxes paid by the top 10 percent increased by 2.5 percentage points, the share paid by the top 5 percent increased by 2.4 percentage points, and the share paid by the top 1 percent increased by 2 percentage points.

As for federal income taxes, between 2000 and 2006, the share paid by the top 10 percent grew by about 3.5 percentage points, the share paid by the top 5 percent grew by roughly 3.7 percentage points, and the share paid by the top 1 percent grew by around 2.5 percentage points, according to the IRS.

Those are a lot of numbers, but they are inseparable from the tax policy debates that have raged during the 2008 presidential campaign. America’s top income earners now shoulder a greater share of the federal tax burden than they did when President Bush first took office, and they shoulder a much greater share than they did in the early 1980s. Remember that the next time some politician or pundit rails against “tax cuts for the rich.”

http://www.american.com/archive/2008/october-10-08/america-has-a-highly-progressive-tax-system
 
source: Center on Budget and Policy Priorities


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Corporate Tax Shelters

In recent years, there has been considerable concern about the increasingly aggressive use of tax shelters by corporations to avoid paying taxes. The impact of these tax shelters — which, by definition, are designed to hide income — are not captured in the Congressional Research Service data on effective tax rates, because those data rely on corporate income that has been reported to the IRS. If the income hidden through tax shelters could be estimated and a more accurate estimate of total corporate income derived as a result, the effective corporate tax rate would be shown to be lower — possibly substantially lower — than is depicted here.

For instance, a study by the Institute on Taxation and Economic Policy used the annual reports of 250 major corporations between 1996 and 1998 to examine both these corporations’ incomes and their tax payments. These annual reports typically include the income that companies shelter from the tax authorities but include in their reports to shareholders. The study found that of these 250 large corporations — which together pay about 30 percent of all corporate income tax in the United States — one in six paid no corporate income tax whatsoever in at least one of these years. The effective tax rate of these corporations declined over the three-year period from 22.9 percent to 20.1 percent.[14] (The CRS figures, in contrast, show the effective rate as being essentially flat or rising slightly over these years. The CRS figures do not reflect the effects of increased tax sheltering.)

Further, the study by the Institute on Taxation and Economic Policy points out that these effective tax rates are well below the 26.5 percent rate that a comparable survey estimated for a similar group of corporations in 1988, at a time when effective rates were higher because the 1986 Tax Reform Act had closed corporate loopholes and those loopholes had not yet been reopened or replaced with new corporate tax breaks. One of the study’s authors, Robert McIntyre, director of Citizens for Tax Justice, recently testified before the House Budget Committee that corporate taxes as a percent of corporate profits could decline to less than 15 percent this year.[15]

No precise estimate exists of the amount of income that corporations shelter from income tax. As noted, the Joint Committee on Taxation believes that the amount of corporate tax shelter activity cannot be measured with existing data. It finds that “much of the evidence in this area is anecdotal, but the importance of this anecdotal evidence should not be discounted.” Rather than using macroeconomic data, the Joint Committee examined three tax shelters that have been disallowed by the courts. It found that these three cases alone resulted in revenue losses of $7.4 billion over several tax years and that “this amount most likely represents a fraction of the corporate tax that the Federal government is not collecting because of corporate tax shelters” because corporations using shelters escape audit and shelters goes undetected.

More recently, in testimony before the Senate Finance Committee on IRS efforts to curb abusive tax shelters, the General Accounting Office confirmed that the IRS believes that tens of billions of dollars have been lost to tax shelters.[16] GAO cited a database maintained by the IRS that shows that through 2003 about $85 billion in revenues have been lost as a result of known tax shelters (used by businesses and wealthy individuals) that IRS has officially classified as abusive or that have characteristics of abusive transactions. These revenue losses date back to 1989, but the majority occurred in years after 1993. Another analysis, which was conducted by a contractor at the request of the IRS, concluded that the revenue losses from corporate tax shelters alone were even higher, estimating an average annual loss of between $11.6 billion and $15.1 billion for the period 1993 through 1999. The estimates also show that the size of the abusive shelter problem grew in each year analyzed, with the revenue loss reaching between $14.5 billion and $18.4 billion in 1999. Although the GAO and IRS expressed some concerns about the methodology used in the study, it is possible that the estimates understate the problem because the analysis reflects only the tax losses associated with sheltering by large corporations and because it relied on a conservative definition of abusive shelter.

Beyond this evidence, another sign that corporate tax sheltering is on the rise is the divergence between the “book” income that corporations report to their shareholders and the income that these corporations report to the IRS for tax purposes. A number of studies conducted in recent years have identified very large gaps between “book” and “tax” income, including a 1999 Treasury Department analysis that concluded that tax shelter activity was one of the factors causing this divergence.[17]

A more recent National Bureau of Economic Research study reached similar conclusions. It found that this gap has grown and that in 1998, some $154 billion — or more than half of the gap between “book” and “tax” income for that year — could not be explained by the traditional accounting differences. The author concluded that “the large unexplained gaps between tax and book income that have arisen during the late 1990s are at least partly associated with increased sheltering activity.”[18]
 
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<A HREF="http://www.theatlantic.com/business/archive/2013/08/the-maddening-unmoving-economic-gap-between-blacks-and-whites/279151/">link</A>

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Equality of Opportunity

Equality of Opportunity
Richard Posner
10/20/2013

Income inequality in the United States has grown substantially since the 1970s, to the point where today the bottom 20 percent of the nation’s households have 5 percent of total income, the top 10 percent about 50 percent, and the top 1 percent more than 20 percent. The question is whether such a high level of inequality is likely to reduce what is called “relative mobility,” or the likelihood that members of one generation of a family and members of the next generation will end up at different points in the income distribution. You are very likely to earn more than your father; the question is how likely are you to be higher (or lower) in the income distribution. If he is in the bottom quartile, for example, how likely are you to be in the next higher quartile?

Income inequality in the parents’ generation might be expected only to create income inequality in the next generation. Whether income inequality will affect relative mobility will depend on why income inequality in the current population is so high. One possibility is that, because of increased assortative mating as a result of declining discrimination and of the efficiency of online search for potential mates, there are greater differences in IQ across families than there used to be. Another possibility—closer to a certainty—is that as a result of automation in the broadest sense, the economic returns to IQ have risen relative to the returns to strength and stamina, which are the qualities important to such vocations as factory work, construction, mining, and farming.

The combination of assortative mating with higher returns to IQ could have dramatic effects on relative mobility if the effect was to insulate to a significant degree a prosperous family’s children from economic risk. And it may be. The adults in high-IQ families are disproportionately represented in the jobs (professional, managerial, financial, and so forth) that pay well, and their income can and often is used to give their children a boost—for example in the form of payment of tuition to high-quality (and very expensive) private schools, payment to tutors, a variety of other educational enrichments, and entry into high-quality colleges without need for their children to borrow to finance college (or graduate or professional school) and thus assume debt. Colleges like to admit kids from high-income families, seeing such kids as future donors. And high-IQ parents are likely to produce high-IQ children, further enhancing the children’s attractiveness to first-rate colleges. These factors, which loom larger the greater the inequality in the income distribution, because that inequality creates a highly affluent tier of families (a proximed by the income shares of the top 10 percent and within that group the top 1 percent) are likely to reduce relative mobility, by securing a disproportionate number of the top college and university admissions and top jobs for children of the intellectual-economic elite.

These factors can be offset to a significant extent by immigration, because immigrants tend to be more ambitious, bold, and determined than the average member of their nation of origin; refugee immigrants are often drawn from the elite of their nation of origin. First-generation immigrants tend not to have a high income, but to endow their children with the attitudes and abilities that enable the children to achieve economic success. Certainly the United States has benefited greatly in recent
years from immigration from countries like China, India, and South Korea. But relative mobility that is the consequence of the artificially depressed income of first-generation immigrant families does nothing to promote relative mobility for the children of low-income native-born Americans.

A 2011 study by Scott Winship for the Brookings Institution reports that the likelihood that an American will rank higher in the income distribution than his parents is lower than in most other wealthy countries. The report states: “If being raised in the bottom fifth [of the income distribution] were not a disadvantage and socioeconomic outcomes were random, we would expect to see 20 percent of Americans who started in the bottom fifth remain there as adults, while 20 percent would end up in each of the other fifths. Instead, about 40 percent are unable to escape the bottom fifth. This trend holds true for other measures of mobility: About 40 percent of men will end up in low-skill work if their fathers had similar jobs, and about 40 percent will end up in the bottom fifth of family wealth (as opposed to income) if that’s where their parents were.” Income inequality is greater in the United States than in our peer countries, and may be responsible for our lower relative mobility. In the limit, an income distribution that produces a very wealthy top tier of earners and a very large bottom tier of poor or low-income families may reduce movement between the tiers in subsequent generations.

Becker points to Headstart and other government programs as possible counters to the effect of income inequality on economic opportunities for children of families that are rank low in the income distribution. This raises the question whether there may be a more efficient way of dealing with the problem of relative mobility than spending government money. A natural starting point would be to increase the very low federal income tax rate (15 percent) on dividends and capital gains, which is a significant factor in the increase in income inequality.

http://www.becker-posner-blog.com/2013/10/equality-of-opportunity-posner.html
 


Why the Rich Should Be Rattled​


Thomas Piketty, a French economist who thinks the increasing concentration of wealth threatens democratic societies . . . argument boils down to this: Economic history suggests that the golden years that followed World War II and the technology boom of the 1990s were exceptions, and that the kind of slow growth we're seeing now is more normal.

During periods of slow growth, he posits, income grows slowly for all but the top 1%. But investments are another matter; on average, they grow faster than the economy.

These days, we'd be delighted to see the U.S. economy grow by 3% a year, but anyone with investments expects them to grow at least 4% a year (and, of course, hopes for more).

When wealth grows faster than income, so does the gap between rich and poor. Those with wealth will see their assets grow ever larger, while those who have little or no wealth will miss out.

"If society doesn't think it's a fair game, it will not work, no matter what we think. 'Let them eat cake' didn't work so well in France."

Piketty has clearly found our not-so-sweet spot. Perhaps it's that, on some level, we're all finally worried — rich and poor alike — that, as he warns, <SPAN style="BACKGROUND-COLOR: #ffff00">the growing inequality is likely to create resentment and class warfare.</span>

These resentments will increase, Piketty suggests, as wealth passes from the hands of entrepreneurs and investors — who at least had a hand in creating their fortunes — to their heirs, who simply had the good luck to be born into wealthy families.

The growth of that inheritance-heavy elite, Piketty warns, will "radically undermine the meritocratic values on which democratic societies are based," <SPAN style="BACKGROUND-COLOR: #ffff00">with "consequences [that] are potentially terrifying."</span>



Solutions Politically Impossible

Inequality of wealth, Piketty argues, also makes it harder to create the kind of equal opportunity that can help level the playing field. Take education, the most important escape route from poverty for generations. Piketty notes that the average income of Harvard students' parents is now about $450,000 a year. That's the parents of all Harvard students, not just the alumni legacies. So much for pure meritocracy.

But even if we all agree there's a problem, we're still far apart on a solution, and the prescription Piketty offers belongs on the fantasy shelf.

He says the best remedy would be an annual tax on capital. Anyone who owns more than $1.5 million in assets might be taxed, say, 1%, while assets over $5 million might be taxed at 2%.

That idea is economically logical, but it's politically impossible. Too many American voters would think it sounds like communism. Besides, it would require an international treaty to keep rich people from simply moving their assets to tax havens. Even Piketty calls it "a utopian idea."

Raising income taxes on the 1%, as President Obama has repeatedly and fruitlessly asked Congress to do, might help, but it wouldn't get at those giant pools of inherited wealth. Or, Piketty suggests, we could reinstitute the estate tax, which now applies only to bequests over $5.34 million, the top 0.1% of estates. But none of that is likely to happen in this anti-tax era.

We've reached a moment, in other words, when there's broad consensus that we have a problem but we've sworn off all the obvious ways to fix it.

Long ago, Herb Stein, the chief economic advisor to President Nixon, coined Stein's law: If something cannot go on forever, it will stop. Our growing gaps in income and wealth are likely to continue for a long time, but they won't continue indefinitely. All that remains to determine is how — and how badly — they will end.​





http://www.latimes.com/opinion/comm...ality-20140430,0,7308886.column#ixzz30apRuOls
 
So, getting a starter job from nothing is bad now?

I could go on, and talk about how CERTAIN regulations by our government is creating this type of job climate. However, we all know that President Obama is going to fix this.

If he can't fix it, NO ONE can....

:rolleyes:

*edit* the old "wealth inequality" argument is stale. This is where the left goes when nothing else seems to work politically.

We should focus on providing more opportunities. Hell, what do I know? I'm just a dumb republican who actually cares about my race. I don't suppose to exist...
 
So, getting a starter job from nothing is bad now?

I could go on, and talk about how CERTAIN regulations by our government is creating this type of job climate. However, we all know that President Obama is going to fix this.

If he can't fix it, NO ONE can....

:rolleyes:

*edit* the old "wealth inequality" argument is stale. This is where the left goes when nothing else seems to work politically.

We should focus on providing more opportunities. Hell, what do I know? I'm just a dumb republican who actually cares about my race. I don't suppose to exist...

We should focus on providing more opportunities. Hell, what do I know? I'm just a dumb republican who actually cares about my race. I don't suppose to exist...


I agree dumb republican, but the only thing the dumb republicans want to talk about is Benghazi.


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Has Rising Inequality Brought Us Back to the 1920s? It Depends on How We Measure Inco

Has Rising Inequality Brought Us Back to the 1920s? It Depends on How We Measure Income
Gary Burtless
May 20, 2014 11:20am

It is now commonplace to say American inequality has reached a peak not seen since the roaring ‘20s. Though often repeated, the claim is flatly untrue under the most comprehensive—and meaningful—definition of family income.

In a widely circulated column, Adair Turner, former chairman of UK’s Financial Services Authority, told readers “The top 1 percent of Americans … have seen their incomes almost triple [since 1979], with their share of national income reaching 20 percent, a figure not seen since the 1920s.” Eduardo Porter recently informed New York Times readers that “The share of national income captured by the richest 1 percent of Americans is even higher than it was at the dawn of the 20th century.” Both writers also noted that U.S. households at the bottom or in the middle of the income distribution have seen almost no gain in income since the 1970s.

It is not hard to find income series that support Turner’s and Porter’s summary of the historical trends. Thomas Piketty and Emmanuel Saez have published statistics based on IRS records and the national income accounts suggesting that the percentage of cash market income received by top income recipients is near the peak seen in the late 1920s. (“Cash market income” consists of taxable wages, self-employment income, interest, dividends, and other cash income other than government benefits.) The Census Bureau publishes income distribution statistics based on households’ pre-tax cash incomes, that is, their cash market incomes plus the cash government benefits they receive.

The Piketty-Saez estimates confirm the claim that Americans in the top 1% receive a historically large share of pre-tax cash market incomes. The Census money income statistics show that, between 1979 and 2012, households in the middle of the income distribution saw small income gains while households in the bottom one-fifth experienced small losses in average incomes. Both income series have a venerable place in the nation’s economic statistics. The income tax statistics give us one of our oldest statistical series on the distribution and trend in U.S. incomes. The Census Bureau’s money income statistics, which date back to the mid-1940s, add to the information provided by IRS statistics by expanding the types of income that are included and providing information on a more broadly representative sample of Americans. (A sizeable but varying percentage of families do not file income tax returns, while nearly all households can be interviewed in the Census Bureau’s annual income survey.)

A notable problem with both the IRS income series and the Census Bureau’s money income statistics is the omission of personal tax payments and noncash income items from the income measure. For example, neither income series includes food stamps, housing assistance to low-income families, or the free health benefits provided by companies to their employees and by the government to people enrolled in Medicare or Medicaid. The IRS income tabulation published by Piketty and Saez excludes all government transfer benefits, including cash as well as in-kind transfers.

An unfortunate side effect of these omissions is that an increasing percentage of the gross incomes received by Americans is excluded from the most commonly cited income measures. At the same time, the two income series miss the effect of shifting tax policy on family tax burdens. The Congressional Budget Office has tried to remedy these deficiencies by including most of the missing income items in a more comprehensive income definition. In addition, it has adjusted the income statistics to reflect size differences among households. It seems plausible to think a single-person household can live more comfortably on $40,000 a year than a four-person family. Household size has shrunk over time, so even if median household income has remained unchanged, the income available to support each household member has gone up. Finally, the CBO has made adjustments in households’ income to reflect the federal taxes they are expected to pay through social insurance contributions, personal and corporate income taxes, and excise taxes. (Unfortunately, the adjustments do not include the effects of state and local taxes.)

The CBO income measure is far from perfect, but it comes closer than the older income series to reflecting the spendable incomes of American families. If we define income to mean the annual resource flow available to a family to pay for its consumption, including health care, then the CBO income measure does a far better job than either the cash market income reported on families’ income tax returns or the Census money income measure. Instead of showing that the incomes of low- and middle-income families barely budged after the late 1970s, the CBO tabulations suggest that Americans in the bottom one-fifth of the distribution saw their real net incomes climb by almost 50%. Those in the middle fifth of the distribution saw their incomes grow 36%. Their after-tax income gains are nowhere near as large as those enjoyed by the top 1%, who saw their after-tax incomes triple, but they reflect a sizeable improvement in household net incomes. The estimated gains are also more consistent with our aggregate statistics on the overall trend in disposable income.

It is harder to evaluate longer term changes in American inequality under a comprehensive net income definition. So far as I know, no government agency or scholar has offered such estimates. It should be plain, however, that under a comprehensive income definition inequality is far lower today than it was in the late 1920s. In 1929 government transfer payments to households represented less than 1% of U.S. personal income. Fifty years later, in 1979, government transfers were 11% of personal income. By 2012 they were 17% of personal income.

We have only one inequality estimate showing distributional trends back to the late 1920s, and that is the one calculated by Piketty and Saez. Their measure of income excludes government transfers. Everything we know about the distribution of government benefits suggests they narrow income disparities. They are a much more important component of income for low- and middle-income families than for the well-to-do, who derive nearly all their pre-tax incomes from the market. The CBO estimates show, for example, that when we rank households by their market incomes, households in the bottom one-fifth of the distribution receive almost three times as much government transfers as market income. Households in the middle fifth of the market income distribution receive about one dollar in government transfers for every $5 in market income. The households in the top 1% of market income recipients receive about $150 in market income for every $1 they receive in government transfers. These estimates are based on CBO estimates of 2010 incomes. We do not have comparable estimates for the late 1920s, but we know that government transfer benefits constituted less than 1% of personal income at that time. It follows that the final distribution of income—including tax payments and transfer benefits—was much closer to the distribution of market income. In the 1920s government transfers were far too small to have a noticeable impact on the distribution of final incomes.

Though most experts on income measurement are aware of the shortcomings of the standard income measures, it is surprising how little of this knowledge has seeped into popular discussion of inequality. Based on our best statistics it is almost certain that market income inequality, after shrinking in the four decades through 1970, began to grow again and has now reached a peak last seen in 1928. However, progressive income taxes and government redistribution are far more important in determining Americans’ incomes today than they were in the 1920s. To disregard the impact of transfers and progressive taxation on the distribution of income and family well-being is to ignore America’s most expensive efforts to lessen the gap between the nation’s rich, middle class, and poor.

http://www.brookings.edu/blogs/up-f...ng-inequality-1920s-measuring-income-burtless
 
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