Income Inequality

As we approach the 2016 Presidential Election one of the biggest issues facing our country is the American Economy.  There’s a lot of differing opinions coming from every direction on this issue so I decided to take a fact based approach and see where it led me.

Before I dig into the details, I want to make note of the fact that even those Americans who are living in poverty are far better off than most people in the world.  If you make $12k per year, which is just below the poverty line in America, you are still in the top 15% when you look at the entire world.

The point of this post is not to complain about how bad most Americans have it, it is to shed light on just how good a very small number of Americans have it and try to understand why all Americans have not seen proportionate shares of the economic success of our country.

One of the first and most glaring pieces of information I found is how massive the gap between the wealthy and the not so wealthy has gotten in our country.  Look at this chart:


You can see that over the past few decades, the income for the top 5% and top 20% has grown at a much higher rate than the rest of the population.  But the picture starts to look even worse when you narrow it down to the top 1%:

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As you can see here, the increase in income for the top 1% makes the gains of even the top 20% look minuscule in comparison.  The top 1% are people who are making $389k annually (as of 2011).  But what happens when you dig even deeper into the folks at the very top?

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The top 0.1% has seen their income grow exponentially even compared to the top 1%!!!

Now I am all for capitalism and the idea of generating wealth, but by looking at these charts I have to ask myself…. “Why is the income at the very top growing so rapidly while the income at all other levels seems to get left behind?”  Is it really just because the people at the top are working 100’s or 1000’s of times as hard as the rest of us?  Or are they that much smarter than everyone else that they deserve to receive the majority of the wealth generated in this country?  Or is a big part of it that they have been taking full advantage of the tax system that they helped create in the first place?

This next series of graphs shows the Highest, Lowest and Effective tax rates for someone making $50k today and back in 1945 vs. someone making $10M today and back in 1945.

Today multimillionaires effective tax rate is still higher than the majority of the population, but the effective tax rate for the “middle class” has stayed about the same since the mid 1940’s.

I don’t want to imply that correlation is synonymous with causation, but look at these additional graphs that show major changes around the same times the highest tax rates began to drop:

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Between 1980 and 1990 you see four things happen:

  1. The highest effective tax rate took another big drop
  2. The GDP growth rate began to slow from regularly being above 8%
  3. The hourly productivity vs. hourly compensation graph began to diverge
  4. The CEO-to-worker compensation ratio makes a turn up the hill

In addition, lets look at where the majority of the tax incentives and deductions have been going:

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So after seeing this data you learn that not only have the effective tax rates for the wealthy gone down, they have also received massive amounts of exclusions, deductions and preferential tax rates.  When you account for all of that you get the actual tax rates for the ultra rich:

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So the top 0.001% (people making $62M+ per year) are paying about the same tax rate as people in the top 20% (making about $85k per year).

Now in addition to this, there are a record 54 U.S. corporations that pay no taxes or are at least partially exempt. That’s more than twice the amount than five years ago.  Most of them actually got tax refunds.  And Between 2008 and 2013, American firms held more than $2.1 trillion in profits overseas—that’s as much as $500 billion in unpaid taxes.

The result of all of these incentives for wealthy corporations and the ability to hide profits over seas to avoid paying taxes?  In fiscal year 2014, 10.6% ($320.7 billion) of the federal government’s total revenue came from corporate income taxes, according to Pew Research Center.  Comparatively, corporate income tax accounted for between a quarter and a third of federal revenue in the 1950s.

So apparently the idea that putting more money into the pockets of the corporations and their leaders would result in more jobs, higher paying jobs and an improved economy has in fact been true, but only for those people at the top of the pile.

So what do we do?

My thoughts are:

  • Eliminate most of the corporate incentives, tax breaks and preferential tax rates that only benefit the super rich
  • Close the loophole allowing corporations to hide profits off shore
  • Increase the minimum wage to at least catch up to inflation
  • Possibly implement some sort of cap on CEO to worker pay ratio
  • Raise the top effective tax rates for the ultra rich (no, this would not affect most Americans)

I honestly believe that an economy that has hundreds of millions of people with economic security and stability would spawn an age of economic growth unlike anything we’ve ever seen.  Instead of a handful of billionaires sitting on massive piles of cash, people would be out spending it and driving that GDP up.

Throw in the ideas that healthcare should be a right and that education shouldn’t put you tens of thousands of dollars in debt and I think you have a pretty great looking country right there.

Guess who has shown support for many of these ideas?


Bernie Sanders – look him up.

P.S. – No I don’t support “free handouts” and yes I believe you should work hard for what you get.  These ideas are not mutually exclusive.



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