Income Inequality

What is the situation with respect to the wealth and income gap between the rich
and poor in the United States? Should something be done about it, or is the gap a
healthy part of capitalism?

Amy Miller
5/3/2014





Income Inequality is a debate among politicians. Some government officials believe that we
need to create laws to narrow the gap between the wealthy and the poor, whereas others
would like to leave the free market alone. So a question has been queried, what is the situation
with respect to the wealth and income gap between the rich and poor in the United States?
Should something be done about it, or is the gap a healthy part of capitalism?
To answer to this question, we must first examine the facts. With these facts we can attempt to
answer why these facts exist and ultimately determine if new laws created federally or locally
could be a solution to the problem.
While much of the growth in the economy shared its prosperity from the end of the great
depression until the 1970s, it didnt widen or narrow the gaps of wealth and the middle class to
a significant degree. But after those prosperous years, a change began as the gap began to
widen. Income for the top earners grew rapidly while the income for the middle and bottom
earners slowed down, causing a much larger gap between them. (Stone, Trisi, Sherman, &
Chen, 2014, Center on Budget and Policy Procedures.)
When looking at statistics on the subject economic inequality, the Census Bureau is a useful
source of statistics. They typically use two methods to evaluate the statistics and what they
mean. According to their website it states,

The Census Bureau traditionally reports two measures of income inequality: (1) the shares of
aggregate household income received by quintiles and (2) the Gini index. In addition to these
measures, the Census Bureau also produces estimates of the ratio of income percentiles; the
Theil index, which is similar to the Gini index in that it is a single statistic that summarizes the
dispersion of income across the entire income distribution; the mean logarithmic deviation of
income (MLD), which measures the gap between median and average income; and the Atkinson
measure, which is useful in determining which end of the income distribution contributed most
to inequality. (U.S Census Bureau, 2012, Allison)

In the 1980s the widening of the gap seemed to slow down until 2010 when the Gini
coefficient reached its highest level in three decades. It is also important to note the rise in
poverty rose from 12.5 % in 2007 to 15 % in 2012 and. the child poverty rate increased from
18.0 percent in 2007 to 21.8 percent in 2012. While the poverty rate had increased to the 15%
mark during previous recessions, the severity of this recession is greater. The main reason for
less impact is because of broader and more available safety net programs. (Aka welfare) In the
absence of safety net resources, the recession would have been felt much greater among the
poor at a measurement of 14.5% higher. We will revisit safety net programs later. (Stanford
Center for Poverty and Inequality, 2014, accessed 3. May 2014)

It is important to point out that the recession certainly has an impact on the income gap. While
it is composed of mixed outcomes on the different variables associated with it, it is important
to note that it brought about an increase in standard household income-based measures, it led
to a flattening of consumption inequality as well as a decline in the income share going to top-
income households.

According to the Stanford Center for poverty and inequality, There was robust growth in
wealth from 1983 to 2007. Median wealth grew at 1.1 percent per year from 1983 to 1989,1.3
percent per year between 1989 and 2001, and then at 2.9percent per year from 2001 to 2007.
Between 2007 and 2010, the median wealth plunged by a staggering 47 percent. The primary
reasons were the collapse in the housing market and the high leverage of middle class families.
(Stanford Center for Poverty and Inequality, 2014, accessed 3. May 2014)

While the high income earners, middle class and the poor statistically seem to be on the same
track when it comes to income fluctuation during and between recession periods since 1980,
there is an undeniable truth that the top earners (the top 1%) seem to continue to see growth
in income.



So what can be done about this? Should there be something to be done about this? It seems
the top 1% are outliers, if you will, when it comes to the state of the economy. So we may
be able to divide the classes into two. The top 1% and the bottom 99%.


Share of wealth held by the Bottom 99% and Top 1% in the United States, 1922-2010.
Bottom 99 percent Top 1 percent
1922 63.3% 36.7%
1929 55.8% 44.2%
1933 66.7% 33.3%
1939 63.6% 36.4%
1945 70.2% 29.8%
1949 72.9% 27.1%
1953 68.8% 31.2%
1962 68.2% 31.8%
1965 65.6% 34.4%
1969 68.9% 31.1%
1972 70.9% 29.1%
1976 80.1% 19.9%
1979 79.5% 20.5%
1981 75.2% 24.8%
1983 69.1% 30.9%
1986 68.1% 31.9%
1989 64.3% 35.7%
1992 62.8% 37.2%
1995 61.5% 38.5%
1998 61.9% 38.1%
2001 66.6% 33.4%
2004 65.7% 34.3%
2007 65.4% 34.6%
2010 64.6% 35.4%
Sources: 1922-1989 data from Wolff (1996). 1992-2010 data from Wolff (2012).
While much of this data is fascinating it begs the question, would it be fair to narrow this gap?
Many people believe we should and that it is necessary for a thriving economy. This seems to
be the platform for politicians, most notably from the Democratic Party, to create laws or
eliminate laws to help narrow this gap.
The first is the idea of taxes. Many argue taxes are unfair and the rich should contribute more
to the federal government then the lower classes. This rich is not necessarily defined by the
American government as the top 1%. People that make $225,000 $450,000 (depending on
their filing claim) of adjusted gross income are considered those that are responsible for the
steepest tax responsibility. (Erb, Forbes, 2014, accessed 3. May 2014)
Citizens for Tax Justice, a research group that's been studying tax issues from its offices in
Washington since 1979 and breaks down the tax liability of income earners to the IRS. The
graph below indicates the amount paid by income earners. It seems it moves progressively
until it reaches the top 15%. From there the tax liability slows a great deal and even drops 0.8%
to the top 1%.


Share of income paid as tax, including local and state tax

Source: Citizens for Tax Justice (2010a). Graph retrieved from http://www2.ucsc.edu/whorulesamerica/power/wealth.html

Another concern and is a hot topic right now is the current minimum wage. There is a push
from our current administration to up the minimum wage from 7.29 an hour which was
effective in 2009 to 10.10 an hour by 2016. They claim that this increase will bring people out of
poverty and narrow the income gap.
According to the Congressional Budget Office, a non-partisan analysis for the U.S. congress
states:
Increasing the minimum wage would have two principal effects on low-wage workers. Most of
them would receive higher pay that would increase their familys income, and some of those
families would see their income rise above the federal poverty threshold. But some jobs for
low-wage workers would probably be eliminated, the income of most workers who became
jobless would fall substantially, and the share of low-wage workers who were employed would
probably fall slightly. ( Congressional Budget Office, 2014, accessed 3. May, 2014)





So with the facts, statistics, and analysis from non-partisan groups we can come to a few
conclusions. 1-The top 1% hold about 35.4% of the national wealth. They also pay relatively
lower taxes then the top 20%. While all others pay progressively higher taxes the more wealth
they have.. 2- The Federal Government has a few ideas to lessen the gap between high income
and low income. These two repeated ideas are raise taxes for the wealthy and inrease the
minimum wage. Other ideas are either not well documented or they arent taken seriously
because of their historical repocussions. (i.e. communism and socialism)
While the idea of raising taxes of the top earners and lessening the taxes of the low earner
mays seem like an excellent idea, the top earners will still make the top earnings. This wont
narrow the gap. It will only redistribute tax liability and may possibly translate to less jobs, or
lower wages for workers.
The second idea is raising minimum wage. While the graphs indicate that it would boost people
out of poverty, they also indicate that jobs overall would be lost. But with these considerations
in mind over all raising the minimum wage would be more beneficial according to this report.
Unfortunately there is a much larger ripple effect when you consider raising minimum wage. If
a minimum wage is increased say $2.85. Other workers who have skills that are currently
earning 10.10 or higher would also like an increase of the same amount or more. While a large
portion of employers who hire skilled workers are from the small business sector, many small
business owners would have to make a decision whether or not to maintain their employer, or
pass on the cost to the consumer. Most like option #2. So lower income workers that are now
making 10.10 an hour need hire that plumber whos rates have gone up to make up the
difference of raising their employees salary. This in turn brings that 10.10 minimum wage right
back into poverty. Maybe not right away, but soon.
It seems that when recession occurs it has the greatest effect on those who are in poverty and
who are missdle income workers. It would be in our best interest to safeguard our economy for
subsequent recessions, if we can ever pull ourselves out of our current one.
So in answer to the question if the income gap is a healthy part of capatilism? Not sure,
America certainly is not very capitalist anymore. With the excess of laws, heavy taxation, and
regulation of our wealth, it seems we are no longer free to choose.
With that being said, it is of personal opinion that more government intervention, beyond what
there already is will do only more harm than good. This personal opinion is not alone, 59% of
those polled by a Rasmussen report stated that less government involvement, not more will be
more effective in handling the income gap. (Rasmussen Report, accessed through
http://www.rasmussenreports.com/public_content/politics/general_politics/january_2014/59_
say_less_government_not_more_would_help_close_income_gap) True capitalism is less
government not more. According to the book written by Milton & Rose Friedman in Freedom to
Choose, Capitalism is the driving force of the economy. It allows the system, which is
competitive by nature to freely pursue their own reward. This is enough for men to have the
drive to become successful; to grow, to pursue education, and to work hard in their own best
interest. This alone would be enough to drive the economy and lesson poverty. Unfortunately,
America is no longer a nation of capitalism. Regulations, and laws continue, and with every law
and regulation inflicted on the American people the more freedom is taken away. This is
causing people to have less ways of becoming successful, causing more people to rely on the
government and looking creative ways to get around certain laws. Ideally it would be in our
best interest to leave well enough alone and continue to work towards a more free society by
lessoning the power the government has over the economy.



Works Cited:
1. Danzinger, S., & Wiming, C. (2014, January 1). Poverty . . Retrieved May 1, 2014, from
http://www.stanford.edu/group/scspi/sotu/SOTU_2014_CPI.pdf
2. Hout, M., & Cumberworth, E. (2014, January 1). Labor Markets. . Retrieved May 1, 2014, from
http://www.stanford.edu/group/scspi/sotu/SOTU_2014_CPI.pdf
3. Who Rules America: Wealth, Income, and Power. (n.d.). Who Rules America: Wealth, Income, and
Power. Retrieved May 4, 2014, from http://www2.ucsc.edu/whorulesamerica/power/wealth.html
4. Erb, K. (2013, September 17). 2014 Tax Brackets, Exemption Amounts Likely To Save Tax Dollars.
Forbes. Retrieved May 4, 2014, from http://www.forbes.com/sites/kellyphillipserb/2013/09/17/2014-
tax-brackets-exemption-amounts-likely-to-save-tax-dollars/
5. Income, Poverty, and Health Care: 2012. (2013, September 1). . Retrieved May 4, 2014, from
http://www.census.gov/prod/2013pubs/p60-245.pdf
6. Sherman, A. (2011, November 17). POVERTY AND FINANCIAL DISTRESS WOULD HAVE BEEN
SUBSTANTIALLY WORSE IN 2010 WITHOUT GOVERNMENT ACTION, NEW CENSUS DATA SHOW. .
Retrieved May 4, 2014, from http://www.cbpp.org/files/11-7-11pov.pdf
7. Congressional Budget Office. (n.d.). The Effects of a Minimum-Wage Increase on Employment and
Family Income. Retrieved May 4, 2014, from http://www.cbo.gov/publication/44995
8. 59% Say Less Government, Not More, Would Help Close Income Gap - Rasmussen Reports. (n.d.).
59% Say Less Government, Not More, Would Help Close Income Gap - Rasmussen Reports. Retrieved
May 4, 2014, from
http://www.rasmussenreports.com/public_content/politics/general_politics/january_2014/59_say_less
_government_not_more_would_help_close_income_gap
9. Friedman, M., & Friedman, R. (1980). Free to choose: a personal statement.. S.l.: [s.n.].