Thursday, October 27, 2011

Income Inequality

A few decades ago, the United States had about as much income inequality as the average developed nation. Now, the United States has the greatest income inequality of any developed nation.

The Congressional Budget Office released a study this week that highlights increased inequality. Between 1979 and 2008, after-tax income of the top 1% almost tripled, while after-tax income of other groups increased by much less. The graph shows clearly that, the lower your income, the less of a share you got in the increased prosperity of the last three decades.

There was some growth of income among all quintiles during the last three decades, but the growth of income decreases steadily as you move to the lower quintiles.

The graph below, which traces the share of the upper 1% historically, shows us one important reason for increased inequality.

During the post-war years and through the 1970s, the share of the top 1% was lower than it is today and decreased steadily. Prosperity was widely shared, with moderate-income groups showing even more gains than the highest income groups.

Then, in the 1980s, there was a drastic reduction of the top income tax rate under the Reagan administration, from a top marginal rate of 70% to a top marginal rate of just 28%. Republicans have continued to insist on lower taxes for the rich ever since, as inequality has soared. .

There are many causes of increased income inequality. One obvious cause is globalization, which has eliminated most of the well paying factory jobs that existed in the 1950s and 1960s, and that now is eliminating the jobs of call-center agents, computer programmers, and others who provide services.

But we could compensate for increasing inequality if we had a progressive income tax with a large Earned Income tax credit. Inequality would be reduced dramatically if we went back to the tax rates of the 1950s, when there was a top marginal rate of 90% on the highest incomes.

Republicans since Reagan have claimed that lower taxes will spur economic growth, and everyone will benefit. But the graphs show clearly that the benefits have gone primarily to those at the top. The average American would be better off if Republicans abandoned the economic policies of the Reagan era and went back to the policies of the Eisenhower era.

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