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Capital Investment Income Drives Income Inequality
A recently published analysis by Thomas L. Hungerford (see highlights below) looks at factors driving the growth of income inequality for the period between 1991 to 2006. Hungerford looked at the contributing impact of three factors, tax policy, labor wages and capital income. During the studied period he found that capital income (capital gains, interest income, business income and dividends) was by far the largest factor contributing to rising income inequality. Wages and salaries alone were not a factor and tax policies were only a minor contributor during this period, largely due to the more favorable tax treatment of capital gains.
This report doesn’t trace the history of income inequality prior to 1991 where changes in wage growth in the late 1970’s and the collapsing of upper income tax brackets in 1980 and 1985 were more dramatic.
It is worth remembering that for most of the past 100 years capital gains was treated as ordinary income for tax purposes. In recent times, capital gains have be treated as a separate class of income with a more favorable tax treatment. Capital ownership has always been more concentrated at the upper end of the income/wealth continuum. Capital is, of course, an ownership stake in our economy whether through stocks, bonds, property or business ownership. The income generated when these capital investments are bought and sold is currently taxed at 15% (if it is held for more than a year). That is less than half the top tax rate for wages and salaries. And how is capital ownership distributed in America?
Who Owns What In America?
The distribution of wealth ownership, as opposed to income inequality, is even more skewed towards the wealthy as the pie chart below shows. The whole pie represents the total wealth in America. Each of the five slices of the pie represent 20% of the US population according to how much wealth they own.
The slice of ownership for the poor and working poor are barely visible. Eighty-percent of all Americans own just 15.6% of America’s wealth. The number of people who slipped into poverty in 2010 was at an all time high of 46.2 million, so the poorest 20% of all Americans, in terms of wealth ownership, includes 15.5 million who are technically above the income poverty line. The poorest 40% of Americans essentially own almost nothing while the top 20% own almost 85% of everything. As a result, favorable tax policies for capital gains income has a highly disproportional benefit for the wealthiest Americans. Capital income for this wealthy segment is what drives rising income inequality today.
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Changes in Income Inequality Among U.S. Tax Filers Between 1991 and 2006: The Role of Wages, Capital Income, and Taxes
Thomas L. Hungerford
thunger@starpower.net
January 23, 2013
Electronic copy available at: http://ssrn.com/abstract=2207372
HIGHLIGHTS FROM THIS REPORT:
Research has demonstrated that large income and class disparities adversely affect health and economic well-being (see, for example, Marmot 2004, Wilkinson 1996, Frank 2007, Singh and Siahpush 2006).
Research has shown, however, that income mobility [in the United States] is not very great and the degree of income mobility has either remained unchanged or decreased since the 1970’s (Hungerford 2011, and Bradbury 2011).
Earnings inequality has been increasing since at least the late-1960s (Kopczuk, Saez, and Song 2010). [The] CBO (2011) has documented that income inequality has been increasing in the United States over the past 35 years.
Three potential causes of the increase in after-tax income inequality between 1991 and 2006 are examined in the analysis: changes in labor income (wages and salaries), changes in capital income (interest income, capital gains, dividends, and business income), and changes in taxes.
Increased salaries paid to CEOs, managers, financial professionals, and athletes, is estimated to account for 70 percent of the increase in the share of income going to the richest Americans (Bakija, Cole, and Heim 2010).
A declining real minimum wage could affect lower income tax filers (the inflation-adjusted minimum wage fell from $6.57 per hour in 1996 to $5.57 per hour in 2006).
Income of the richest 0.1 percent of taxpayers is sensitive to changes in asset prices and this may have been especially important in the increase in the income share of those at the top of the income distribution (Bakija, Cole, and Heim 2010).
Frabdorf, Grabker, and Schwarze (2011) also find that capital income’s share in disposable income has increased in recent years in the U.S. and show that capital income made a large contribution to income inequality in relation to its share in income.
While the individual income tax system is progressive and has been since it was introduced in 1913, the trend has been toward lower marginal tax rates and a less progressive tax system (Piketty and Saez 2007, and Alm, Lee, and Wallace 2005). As a result, the tax system may be less able to equalize after-tax incomes.
The major tax changes between 1991 and 2006 were (1) the enactment of the Omnibus Budget and Reconciliation Act of 1993 (OBRA93), which increased the top marginal tax rate from 31 percent to 39.6 percent, and (2) the enactment of the 2001 and 2003 Bush tax cuts, which reduced taxes especially for higher-income tax filers. The Bush tax cuts involved reduced tax rates, the introduction of the 10 percent tax bracket (which reduced taxes for all taxpayers), [it also] reduced the tax rates on long-term capital gains and qualified dividends. In 1991, long-term capital gains were taxed at 28 percent (15 percent for lower-income taxpayers) and all dividends were taxed as ordinary income. The next year, the
long-term capital gains tax rate was reduced to 20 percent. By 2006, long-term capital gains and qualified dividends were taxed at 15 percent (5 percent for lower-income taxpayers). Tax policy changes that affect progressivity will affect after-tax income inequality (Kim and Lambert 2009, and Hungerford 2010).
Hungerford (2010) notes, however, that about 75 percent of families contain just one tax unit (another 17 percent contain two tax units with the second tax unit usually a cohabitating adult or a working child that cannot be claimed asa dependent on another tax return). Consequently, most of the tax units likely represent a family.
Piketty and Saez (2003) argue that capital gains are not an annual flow of income and have large aggregate variations from one year to another; they exclude capital gains from much of their analysis. Blinder (1980) argues that capital gains should not be included in income because what is important is real accrued capital gains [cashed out]. Also, that capital gains represents partial maintenance of in an inflationary world. [in other words, gains shouldn’t be taxed as it serves as an inflation adjustment for capital]
capitals gains have increasingly become an important source of compensation for corporate executives (through stock options), and private equity and hedge fund managers (carried interests). Consequently, income from capital gains is included in the analysis.
Several recent studies estimate that most or all (in some cases more than 100 percent) of the burden of the corporate income tax falls on labor through reduced wages [while] other evidence suggests that most or all of the burden of the corporate income tax falls on owners of capital. [So take your pick!]
Federal individual and corporate income taxes had an equalizing effect on inequality regardless of the inequality measure. Federal taxes had a slightly greater equalizing effect in 2006 than in 1991—taxes appear to have been slightly more progressive in 2006 than in 1991. The top marginal tax rate in 1991 was 31 percent compared to 35 percent in 2006; the lowest tax marginal rate was 15 percent in 1991 and 10 percent in 2006. However, the increased equalizing effect of the individual income tax is likely due to bracket creep—more income is taxed at the highest rates—than to tax law changes. Tax policy changes appear to have played a direct role: OBRA93 tended to have an equalizing effect on after-tax income while the 2001 and 2003 Bush tax cuts tended to have a disequalizing effect.
Tax policy may have also have had an indirect effect on rising income inequality, especially between 2001 and 2006. The reduction in the tax rate on long-term capital gains and qualified dividends may have led to the increased importance of this source in after-tax income.
Overall, changes in [wage] labor income does not appear to be a significant source of increased income inequality between 1991 and 2006. Wages had no or a small disequalizing effect when other inequality measures are used.
By far, the largest contributor to increasing income inequality (regardless of income inequality measure) was changes in income from capital gains and dividends. Capital gains and dividends were less equally distributed in 1991 than in 2006, though highly unequally distributed in both years.
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Thomas L. Hungerford currently works at the Congressional Research Service (CRS) which is part of the Library of Congress. The CRS provides the policy and legal analysis to Congressional committees and Members, regardless of their party affiliation. CRS staffers sometimes do reports on their own. Hungerford says this report, “… [does] not reflect the views of the Congressional Research Service or the Library of Congress.” Hungerford is well-published in the professional literature. He has worked for the Social Security Administration, the Office of Management and Budget, and the General Accounting Office in the past. The excerpts highlighted here are of my own. You are encouraged to read the full study at the URL address provide above.
Raising Wages Would Revive Our Economy
It seems so obvious that consumption is the fire that powers an economy and money is the fuel. It doesn’t matter from where the spending comes in the short run, but it must come from ordinary people in the long run. Wages paid are dollars spent and a dollar spent is a dollar earned in a free economy. Just as you can dampen consumption by raising the cost of borrowing, you can also dampen consumption by suppressing wages, which is exactly what we have been doing for more than 30 years. Corporations have become cash rich but customer poor. They could end this sluggish economy tomorrow by raising wages.
Living Wage Should Be Our Minimum Demand
Here are the facts: The federal minimum wage = $7.25 /hr. President Obama wants to raise it to $9.00 /hr. The current US Poverty wage = $10.60 /hr. The current living wage rate averages $16 to $23 /hr depending on where you live. The poverty wage rate and living wage rates are based on a 40 hour work week.
Profitable companies paying workers, or their out sourced or supply chain workers, less than a living wage are financially benefitting from government aid to the working poor. We need a stable work force to be competitive. We also can’t have people starving to death in the wealthiest nation on Earth. Companies take advantage of this and let state or federal governments step in to help care for their workers. This amounts to a labor discount. Cheap labor! Corporations are padding their profits at taxpayer expense.
At least 45% of working households require some form of government subsidy to maintain their financial stability. The cumulative effect of wage suppression over the past 40 years has become a huge taxpayer drain on households making more than the median income. While almost everyone’s wages are suppressed relative to GDP, the ranks of the working poor have grown to almost half of the work force. Business profits that have not been shared with workers over the years has gone instead to the wealtiest 1% of American’s creating the huge income inequality we have today.
In effect, profitable corporations and companies are making their higher paid employees subsidize part-time workers and full-time works who make less than a living wage.
So the next time you see that cleaning lady at work, remember your employer is expecting you to subsidize her family though income taxes rather than pay her the living wage she needs just to make ends meet. Every conservative argument against raising the minimum wage is just a smoke screen for the real culpret behind unemployment and our sluggesh economy, Wage Suppression!!!
Minimum Wage Proposal A Small Step
In his State-of-the-Union Address President Obama proposed raising the federal minimum wage to $9.00 per hour and indexing it to inflation. He said a family of four with two children still lives below the poverty line when one parent works full-time at minimum wage. The proposed increase would lift them out of poverty, he said.
by Google Images
What a welcome suprise! Virtually no attention was given to the working poor in the last election. In the past decade real wages rapidly declined for the working poor, driving ever more citizens into the grip of intractable poverty.
When a person works full-time for a profitable company their compensation should enable them to care for their family. When this isn’t the case, they must rely on taxpayer-subsidized housing, food stamps, medical care, daycare, or other supportive services. This takes a toll. It can erode a person’s dignity and self-worth. It can foster a sense of inadequacy or self-loathing.
On a social level the working poor are often labeled and marginalized. They are deemed to be less worthy. They are less likely to be promoted or rehired after a layoff. Any economic hardship at all can lock them into a cycle of poverty where their hope for a better life evaporates with each passing year. Escaping poverty in America today is the exception, not the rule.
Many wealthy companies are just as dependent on government subsidies for cheap labor. Without taxpayer assistance for their workers these companies would have to pay a living wage in order to maintain a stable workforce.
And what is wrong with that? Shouldn’t adequate compensation be part of the cost of doing business? Why should business owners be allowed to pad their profits by cutting labor costs at taxpayer expense?
We can expect the pro-business lobby to oppose an increase in low-wage pay while calling for more spending cuts and lower business taxes. Austerity can’t create more jobs and spending cuts will never result in more pay for low-wage earners. Only an increase in the minimum wage or a living-wage law can do that.
Pro-business economists will claim that a higher minimum wage will increase unemployment and hamstring businesses, especially small businesses. Much evidence suggests the opposite. Higher minimum wages have a simulative effect on the economy. The extra $1.75 per hour will be spent immediately, boosting business profits and sparking more demand.
The pro-business lobby will claim the proposed increase is excessive, but here the facts are against them. Even President Obama got this wrong. The poverty wage for a family of four is current $10.60 per hour. If passed, President Obama’s proposal would still means a minimum-wage worker would have to work overtime, take another part-time job, or have their spouse work part-time to reach the poverty line.
And what does it really mean to be at the poverty line? Does this make a family economically self-sufficient?
No, it does not. A living wage to lift a family of four above the need for taxpayer subsidies is considerably higher. In Wyoming, for example, a living wage for this family is $16.93 per hour. In Virginia it is $20.88 per hour, and in California it is $22.15 per hour. These figures are not government artifacts. They are actual costs based on local free-market economies.
While business owners and corporations may squeal at the size of the proposed increase in the minimum wage, they would still benefit greatly from taxpayer subsidies for their low-wage employees. Raising the minimum wage shifts some of the burden of caring for employees to the employers, but not much. It still doesn’t hold wealthy corporations responsible for their low-wage workers or for the harm that poverty wages inflict on their families.
Do Business Friendly Policies Reduce Poverty?
Do Business Friendly Policies Reduce Poverty?. A look at the numbers.
Wealth Redistribution Begins with A Fair Wage
When America’s wealthy elite talk of the redistribution of wealth it is a derisive term applied to federal aid to the working poor paid out of federal tax revenues. The rich are unhappy that some of their compensation goes to support low wage earners. But the growing need for federal aid to support working families is really a consequence of the unfair redistribution of wealth that takes place every working day.
Beginning around 1978 and continuing today, hourly employees have not received a fair wage for a days work. More specifically, hourly wages stopped keeping pace with the rise of hourly productivity (or GDP). Workers continued generating new wealth but they were no longer receiving a share in the additional wealthy they were creating. This simple fact, compounded over the decades, is the single most relevant factor behind our economic difficulties today. Below are some key findings from a report regarding how America’s wage earners are doing. It is from a report put out by the Economic Policy Institute.
THE STATE OF WORKINGAMERICA
Policy-driven inequality blocks growth for low- and middle-income Americans
http://stateofworkingamerica.org/fact-sheets/key-findings/
Daily stock indices, monthly employment reports, and even quarterly data on the gross domestic product are insufficient indicators for answering this vital question:
How well is the American economy providing acceptable growth in living standards for most households?
EPI’s The State of Working America, 12th Edition looks broadly at available data and concludes that the answer is simply “not well at all.”
This is not because the economy has failed to grow, on average. National income has grown enough to substantially improve the fortunes for all. As the data reveal, however, it is the top 5%, the top 1%, and fractions of the top 1 percent that have received almost all the benefits of the economy’s growth.
America’s low- and middle-income families have suffered a lost decade
22% – Despite an increase in productivity of more than 22 percent [between 2000 and] 2010, typical wage earners made roughly the same amount per hour as in 2000.
↓ 6% – Median family income was 6 percent lower in 2010 than in 2000.
This lost decade of no wage and income growth began well before the Great Recession—which started in Dec. 2007—battered wages and incomes. In the historically weak economic expansion following the 2001 recession, hourly wages and compensation failed to grow for either high school– or college-educated workers.
Another lost decade ahead?
Consensus forecasts predict that unemployment will remain high for many more years, suggesting that typical Americans are in for another lost decade of living standards growth. For example, as a result of persistent high unemployment, the incomes of families in the middle fifth of the income distribution in 2018 will likely still be below 2000 levels.
A generation of rising inequality.
156% – From 1979–2007, wages for the top 1 percent of wage earners grew 156 percent, compared to 17 percent for the bottom 90 percent.
60% – From 1979–2007, the top 1 percent of tax units claimed 60 percent of the cash, market-based income growth, compared to 9 percent for the bottom 90 percent.
38.3% – From 1983–2010, 38.3 percent of the wealth growth went to the top 1 percent and 74.2 percent to the top 5 percent. The bottom 60 percent, meanwhile, suffered a decline in wealth.
Rising inequality prevented wage growth for low- and middle-income workers
0.6% – From 1979–2007, incomes for the middle fifth of households grew, but the annualized rate of growth (0.6 percent) reflects a deep economic failure. This middle-fifth growth lagged far behind average growth over the same period, and pales in comparison to growth during earlier periods of history; between 1947 and 1979, for example, cash incomes (not even including expanded employer-provided and government in-kind benefits like health care) for the middle fifth of American families grew at an average annual rate of 2.4 percent—or four times as fast as what was achieved by the middle fifth of households between 1979 and 2007. If the middle fifth of the income distribution had grown at the average rate of income growth overall, these households would have had income $18,897 higher in 2007.
7% – The typical worker has not gained from improvements in the ability to produce more goods and services per hour worked (productivity growth). Between 1979 and 2011, productivity grew 69 percent, but median hourly compensation (wages and benefits) grew just 7 percent.
Policy choices generated inequality
Policy decisions made over the last several decades have caused this explosive rise in inequality. These decisions include: lowering individual and corporate tax rates; deregulating industries; failing to maintain the value of the minimum wage; failing to protect the right of workers to obtain collective bargaining; and failing to prevent asset bubbles.
Additional findings.
These sobering data could be mitigated by the ability of Americans to move freely up and down the income or wealth ladders (mobility). There is no evidence, however, that mobility has increased to offset rising inequality.
Further examination of the data through the lenses of race and ethnicity finds the overall data obscure the dramatically worse outcomes minorities face.
Gender gaps have been reduced in many of our labor market analyses. While due in large part to substantial gains for women, part of the closing of the gap has occurred because men have lost significant ground.
Half of All Full-time Employees Earn Less Than $19/hr.
Bureau of Labor Statistics
For release 10:00 a.m. (EDT) Thursday, October 18, 2012 USDL-12-2072
Technical information: (202) 691-6378 • cpsinfo@bls.gov • www.bls.gov/cps
Media contact: (202) 691-5902 • PressOffice@bls.gov
USUAL WEEKLY EARNINGS OF WAGE AND SALARY WORKERS THIRD QUARTER 2012
Median weekly earnings of the nation’s 103.6 million full-time wage and salary workers were $758 in the third quarter of 2012 (not seasonally adjusted), the U.S. Bureau of Labor Statistics reported today.
This was 0.7 percent higher than a year earlier, compared with a gain of 1.7 percent in the Consumer Price Index for All Urban Consumers (CPI-U) over the same period.
Data on usual weekly earnings are collected as part of the Current Population Survey, a nationwide sample survey of households in which respondents are asked, among other things, how much each wage and salary worker usually earns. (See the Technical Note.) Data shown in this release are not seasonally adjusted unless otherwise specified. Highlights from the third-quarter data are:
- Seasonally adjusted median weekly earnings were $765 in the third quarter of 2012, little changed from the previous quarter ($773). (See table 1.)
- On a not seasonally adjusted basis, median weekly earnings were $758 in the third quarter of 2012. Women who usually worked full time had median weekly earnings of $685, or 82.7 percent of the $828 median for men. (See table 2.)
- The female-to-male earnings ratio varied by race and ethnicity. White women earned 83.4 percent as much as their male counterparts, compared with black (93.2 percent), Hispanic (87.5 percent), and Asian women (73.1 percent). (See table 2.)
- Among the major race and ethnicity groups, median weekly earnings for black men working at full-time jobs were $633 per week, or 74.1 percent of the median for white men ($854). The difference was less among women, as black women’s median earnings ($590) were 82.9 percent of those for white women ($712). Overall, median earnings of Hispanics who worked full time ($556) were lower than those of blacks ($606), whites ($780), and Asians ($915). (See table 2.)
- Usual weekly earnings of full-time workers varied by age. Among men, those age 45 to 54 and 55 to 64 had the highest median weekly earnings, $976 and $980, respectively. Usual weekly earnings were highest for women age 35 to 64; weekly earnings were $740 for women age 35 to 44, $754 for women age 45 to 54, and $766 for women age 55 to 64. Workers age 16 to 24 had the lowest median weekly earnings, at $437. (See table 3.)
- Among the major occupational groups, persons employed full time in management, professional, and related occupations had the highest median weekly earnings—$1,300 for men and $948 for women. Men and women employed in service jobs earned the least, $530 and $440, respectively. (See table 4.)
- By educational attainment, full-time workers age 25 and over without a high school diploma had median weekly earnings of $464, compared with $648 for high school graduates (no college) and $1,170 for those holding at least a bachelor’s degree. Among college graduates with advanced degrees (professional or master’s degree and above), the highest earning 10 percent of male workers made $3,448 or more per week, compared with $2,311 or more for their female counterparts. (See table 5.)
Revision of Seasonally Adjusted Usual Weekly Earnings Data The Usual Weekly Earnings news release for the fourth quarter of 2012 will incorporate annual revisions to seasonally adjusted data for the number of full-time wage and salary workers and median weekly earnings in current dollars. (See table 1.) Estimates for constant (1982-84) dollar median weekly earnings also will be affected by revisions to the current dollar series. Seasonally adjusted estimates back to the first quarter of 2008 will be subject to revision.
Go to Tables: http://www.bls.gov/news.release/pdf/wkyeng.pdf
Fiscal Cliff’s Specific Tax Breaks About to Expire
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010
From Wikipedia, the free encyclopedia
Key aspects of the law include:
§ Extending the EGTRRA 2001 income tax rates for two years. Associated changes in itemized deduction and personal exemption rules are also continued for the same period. The total negative revenue impact of this was estimated at $186 billion.[7]
§ Extending the EGTRRA 2001 and JGTRRA 2003 dividends and capital gains rates for two years. The total negative revenue impact of this was estimated at $53 billion.[7]
§ Patching the Alternative Minimum Tax to ensure an additional 21 million households will not face a tax increase. This was done by increasing the exemption amount and making other targeted changes. The negative revenue impact of this measure was estimated at $136 billion.[7]
§ The above three measures are intended to provide relief to more than 100 million middle-class families and prevent an annual tax increase of over $2,000 for the typical family.[8]
§ A 13-month extension of federal unemployment benefits.[2][9] The cost of this measure was estimated at $56 billion.[7]
§ A temporary, one-year reduction in the FICA payroll tax. The normal employee rate of 6.2 percent is reduced to 4.2 percent. The rate for self-employed individuals is reduced from 12.4 percent to 10.4 percent.[9] The negative revenue impact of this measure was estimated at $111 billion.[7]
§ Extension of the Child Tax Credit refundability threshold established by EGTRRA, ARRA, and other measures.[7] According to the White House, this would benefit 10.5 million lower-income families with 18 million children.[2]
§ Extension of ARRA’s treatment of the Earned Income Tax Credit for two years.[7] According to the White House, this would benefit 6.5 million working parents with 15 million children.[2]
§ Extension of ARRA’s American opportunity tax credit for two years, including extension of income limits applied thereto.[7] According to the White House, this would benefit more than 8 million students and their families.[2]
§ The above three provisions, as well as some other similar ones, are intended to provide about $40 billion in tax relief for the hardest-hit families and students.[8]
§ An extension of the Small Business Jobs and Credit Act of 2010‘s “bonus depreciation” allowance through the end of 2011, and an increase in that amount from that act’s 50 percent to a full 100 percent. For the year of 2012, it returns to 50 percent.[9] The White House hopes the 100 percent expensing change will result in $50 billion in new investments, thus fueling job creation.[2]
§ An extension of Section 179 depreciation deduction maximum amounts and phase-out thresholds through 2012.[9]
§ Together, the above two business incentive measures were estimated to have a negative revenue impact of $21 billion.[7]
§ Various business tax credits for alternative fuels, such as the Volumetric Ethanol Excise Tax Credit, were also extended.[10] Others extended were credits for biodiesel and renewable diesel, refined coal, manufacture of energy-efficient homes, and properties featuring refueling for alternate vehicles.[9] Also finding an extension was the popular domestic Nonbusiness Energy Property Tax Credit, but with some limitations.[7]
§ Estate tax adjustment. EGTRRA had gradually reduced estate tax rates until there was none in 2010. After sunsetting, the Clinton-era rate of 55 percent with a $1 million exclusion was due to return for 2011. The compromise package sets for two years a rate of 35 percent with an exclusion amount of $5 million. The negative revenue impact of this provision was estimated at $68 billion.[7][11]
§ An extension of the 45G short line tax credit, also known as the Railroad Track Maintenance Tax Credit, through January 1, 2012. This credit had been in place since December 31, 2004 and allowed small railroad companies to deduct up to 50% of investments made in track repair and other qualifying infrastructure investments.[12]
2. ^ a b c d e f “Tax Cuts, Unemployment Insurance and Jobs”. The White House. Retrieved December 17, 2010.
7. ^ a b c d e f g h i j k “Tax Cut Extension Bill Wends Its Way to White House”. Accounting Today. December 17, 2010. Retrieved December 17, 2010.
8. ^ a b “Fact Sheet on the Framework Agreement on Middle Class Tax Cuts and Unemployment Insurance |”. The White House. December 7, 2010. Retrieved December 10, 2010.
9 ^ a b c d e Dupree, Jamie (December 9, 2010). “Tax Cuts Compromise Package Summary”. The Atlanta Journal-Constitution. Retrieved December 10, 2010.
Graphic View of Wealth Distribution in America
Who Owns What In America?
Imagine lining up everyone in America according to what they own, starting with those who own nothing and continuing down the line to those who own a lot. Now divide that line of people into five equally long segments. Each segment would include 20% of the total population, or about 61.7 million people. Next, add up the total amount of what everyone owns in each segment. The result is represented by the pie chart below. The whole pie represents the total wealth in America. The size of each slice represent the ratio of how much each segment owns of America’s wealth. The slice of ownership for the poor and working poor are barely visible. 80% of all Americans own just 15.6% of America’s wealth.
The number of people who slipped into poverty in 2010 is an all time high of 46.2 million, so the poorest 20% in terms of wealth ownership includes 15.5 million folks who technically don’t meet the poverty criteria, based on income levels. The poor essentially own almost nothing. The working poor own twice of almost nothing.
When I first plotted the distribution of wealth in America in this pie chart it reminded me a little of that Pac-Man character. The richest Americans own 84.6% of everything while the remaining 80% of us have 15.4% left. The statistical middle of what I labeled the “Middle America” owns just 4% of America’s wealth assets.
This raises an interest question. How do we define middle class? Is Middle America, as I’ve labeled it here the same as middle-class?
No, We usually define middle class by income levels, not wealth ownership. As of 2011 the median family income has declined to just over $51,000 per year. If we were to define middle class based on 10% of families above and below the median income (as I have done here for wealth ownership, the narrow and very low income range would not fit most peoples conception of “middle class”.
But this pie chart displays the distribution of wealth, not income. It includes all equity ownership in everything from homes to 401K’s, stocks, bonds, businesses, etc. This chart cannot be directly converted to income levels. There are people with equity but not much income and people with large incomes but not much equity.
However, from a visual perspective the median income (middle most income) will still fall somewhere near the center of the red colored slice, about where the label line is drawn. Individuals in that group made about $26,364 per year, or about $52,000 per household in 2010. Beyond that it is difficult to superimpose income brackets on this pie chart
This graphic really make clear just how compressed wealth distribution is in America. Missing from the public dialogue over the past few decades is mention of the working poor. Politicians and the media seem to focus on the middle class or the poor as if there were no working poor.
The other conclusion I come away with is that there is plenty of wealth here in the still wealthiest nation on Earth. Telling ourselves that we can’t afford social services for the poor or good public schools or what ever else we desire as a nation is simply not true. As a nation we can afford a much better society than we have now.
Some US Census Data on Poverty in America
POVERTY IN THE UNITED STATES – Highlights
• The official poverty rate in 2010 was 15.1 percent—up from 14.3 percent in 2009. This was the third consecutive annual increase in the poverty rate. Since 2007, the poverty rate has increased by 2.6 percentage points, from 12.5 percent to 15.1 percent
• In 2010, 46.2 million people were in poverty, up from 43.6 million in 2009—the fourth consecutive annual increase in the number of people in poverty
• Between 2009 and 2010, the poverty rate increased for non-Hispanic Whites (from 9.4 percent to 9.9 percent), for Blacks (from 25.8 percent to 27.4 percent), and for Hispanics (from 25.3 percent to 26.6 percent). For Asians, the 2010 poverty rate (12.1 percent) was not statistically different from the 2009 poverty rate.
• The poverty rate in 2010 (15.1 percent) was the highest poverty rate since 1993 but was 7.3 percentage points lower than the poverty rate in 1959, the first year for which poverty estimates are available
• The number of people in poverty in 2010 (46.2 million) is the largest number in the 52 years for which poverty estimates have been published.
• Between 2009 and 2010, the poverty rate increased for children under age 18 (from 20.7 percent to 22.0 percent) and people aged 18 to 64 (from 12.9 percent to 13.7 percent), but was not statistically different for people aged 65 and older (9.0 percent).
What? Your in the middle class? How does this relate to you?
INCOME IN THE UNITED STATES – Highlights
• Real median household income was $49,445 in 2010, a 2.3 percent decline from 2009.
• Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred in.
• Both family and non-family households had declines in real median income between 2009 and 2010. The income of family households declined by 1.2 percent to $61,544; the income of non-family households declined by 3.9 percent to $29,730.
Data Driven Viewpoints 