Income Inequality

A few weeks ago I put up a post entitled “Is It Really Social (In)Security?  It, to my great surprise, generated more mail than any of the other 400 posts that I have published since starting Media Realism. Some called me a socialist and others an alarmist. I do not believe that I am either. Several, however, asked me to double back on the theme hinted at in the post and address the issue of Income Inequality in the United States.

I must confess to being a bit hesitant to write about this topic. It is very hard to thread the needle and not veer off into partisan politics or give social engineering suggestions when one covers such a hot button topic. I will do my best to limit the discussion to demographics and some financial data but at times will editorialize a bit.

Emanuel Saez, an economist at University of California, Berkeley monitors income and wealth disparity perhaps better than any academic in America. A couple of years back he calculated that income inequality was at a level not seen since 1928. Back then, the top 1% garnered 23.9% of the income and the bottom 90% some 50.7%. With the stock market run-up in the last few years, the number for the top 1% has to be higher than that now. How come? Easy. Only about half of all Americans have any stake in the equity markets. So, with every all time high we hit in the Dow or S&P 500, those on top by default have to be garnering a larger share of US wealth.

Internal Revenue Service data is not current as it takes a while to gather it all, paints the picture for 2015:


AGI*                % of Returns        % of all Taxes Paid   Average Effective 
                                                                                               Tax Rate**                          

$2 million +         0.1                          20.4%                        27.5%

$500k-2 million     .8                           17.9                           26.8

$200-500k         3.6                       20.6                            19.4

$100-200k        12.3                          21.7                             12.7

$50-100k.            21.8.                         14.1                              9.2

$30-50k.               17.6                          4.0                            7.2

Under $30k          43.8.                           1.4                             4.9    


* Adjusted Gross Income. It is Taxable Income after deductions

**Pew Research Center projections based on Internal Revenue Service Data


I would bet that you have probably never seen anything quite like the above table. The first question might be if the top tax bracket were 39% in 2015, how come those making over $2 million  only averaged 27.5% as an effective tax rate? Well, much of their income in a given year can be from capital gains (sale of long term stocks or real estate) and a handful benefited from carried interest which treats short term gains as long term. The rich can and do hire clever lawyers and accountants to arrange their affairs in a way to minimize tax exposure. There is nothing illegal about it; they simply have the means to do it.

I have avoided all terms such as upper class and upper middle class on purpose. Someone living in Youngstown, Ohio or rural Arkansas with an income of $100-200k would be doing great and a family in Manhattan, San Francisco, or the DC suburbs would be middle class at best with twice that income. So where you live is a great driver of lifestyle and purchasing power.

Make no mistake. If you have a free society, there will ALWAYS be some level of income inequality. Some people are smarter, work harder or simply are luckier than others. Others were in the right place at the right time and benefited from their industry taking off like a rocket. So, the Marxian dreams of a truly egalitarian society are just that—a dream.

Yet, today, things seem to be getting increasingly polarized. As noted in the Social Security post, the Federal Reserve reports that some 40+% of Americans do not have the liquidity to cover a $400 repair bill or an emergency room visit. Telling someone who lives paycheck to paycheck and sometimes payday loan to payday loan to maximize their 401k contribution is an absurd fiction. Horatio Alger’s young heroes may have pulled themselves up with energy and ingenuity in early 20th century America but they did not have to cope with the 21st century millstone—student loan debt.  Also, artificial intelligence, robotics and advanced software will cut the need for labor substantially over the next few decades. The top 10% will benefit as they own the means of production. Job training can help alleviate some of the problems but will you truly need as many workers as we have today?

Solutions? Soak the rich, some say. Well, a re-writing of the tax code to require those making over $2 million  annually to pay 35%+ regardless of loopholes would make people feel good but you can see in the table above that there are not all that many of them. So, making a dent in the budget deficit simply would not happen.  Expand transfer payments and entitlements? Would help smooth things out a bit but our deficits are huge already. Tax people earning more than $100k somewhat more? That would help but might not be politically viable as virtually all of those citizens vote.

Over the  long haul, I have some concerns about the inequality trend. Will it cause social instability if it continues to accelerate? Separately, what about personal responsibility? When does a person have to take full responsibility for where they are in life? 21, 35, never?

Things seem to be eroding. Since 1790,when rough data was first gathered here in the USA, each succeeding generation made more money than their parents. Now, Deutsche Bank projects that only 50% of children will earn more that their parents. Amazingly, it is also true of low income people. The American Dream seems to be evaporating.

The late comedian, satirist and social critic George Carlin put it this way—“The reason they call it The American Dream is that you have to be asleep to believe it.”

I will have more about this topic and related issues in future posts.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com