Income inequality in the United States
Income inequality has fluctuated considerably in the United States since measurements began around 1915, moving in an arc between peaks in the 1920s and 2000s, with a 30-year period of relatively lower inequality between 1950 and 1980.
The U.S. has the highest level of income inequality among its (post-)industrialized peers.[1] When measured for all households, U.S. income inequality is comparable to other developed countries before taxes and transfers, but is among the highest after taxes and transfers, meaning the U.S. shifts relatively less income from higher income households to lower income households. In 2016, average market income was $15,600 for the lowest quintile and $280,300 for the highest quintile. The degree of inequality accelerated within the top quintile, with the top 1% at $1.8 million, approximately 30 times the $59,300 income of the middle quintile.[2]
The economic and political impacts of inequality may include slower GDP growth, reduced income mobility, higher poverty rates, greater usage of household debt leading to increased risk of financial crises, and political polarization.[3][4] Causes of inequality may include executive compensation increasing relative to the average worker, financialization, greater industry concentration, lower unionization rates, lower effective tax rates on higher incomes, and technology changes that reward higher educational attainment.[5]
Measurement is debated, as inequality measures vary significantly, for example, across datasets[6][7] or whether the measurement is taken based on cash compensation (market income) or after taxes and transfer payments. The Gini coefficient is a widely accepted statistic that applies comparisons across jurisdictions, with a zero indicating perfect equality and 1 indicating maximum inequality. Further, various public and private data sets measure those incomes, e.g., from the Congressional Budget Office (CBO),[2] the Internal Revenue Service, and Census.[8] According to the Census Bureau, income inequality reached then record levels in 2018, with a Gini of 0.485,[9] Since then the Census Bureau have given values of 0.488 in 2020 and 0.494 in 2021, per pre-tax money income.[10]
U.S. tax and transfer policies are progressive and therefore reduce effective income inequality, as rates of tax generally increase as taxable income increases. As a group, the lowest earning workers, especially those with dependents, pay no income taxes and may actually receive a small subsidy from the federal government (from child credits and the Earned Income Tax Credit).[11] The 2016 U.S. Gini coefficient was .59 based on market income, but was reduced to .42 after taxes and transfers, according to Congressional Budget Office (CBO) figures. The top 1% share of market income rose from 9.6% in 1979 to a peak of 20.7% in 2007, before falling to 17.5% by 2016. After taxes and transfers, these figures were 7.4%, 16.6%, and 12.5%, respectively.[2]
Income distribution can be assessed using a variety of income definitions. Adjustments are applied for various reasons, particularly to better reflect the actual economic resources available to a given individual/household.
The CBO explains the Gini as "A standard composite measure of income inequality is the Gini coefficient, which summarizes an entire distribution in a single number that ranges from zero to one. A value of zero indicates complete equality (for example, if each household received the same amount of income), and a value of one indicates complete inequality (for example, if a single household received all the income). Thus, a Gini coefficient that increases over time indicates rising income inequality."
"The Gini coefficient can also be interpreted as a measure of one-half of the average difference in income between every pair of households in the population, divided by the average income of the total population. For example, the Gini coefficient of 0.513 for 2016 indicates that the average difference in income between pairs of households in that year was equal to 102.6 percent (twice 0.513) of average household income in 2016, or about $70,700 (adjusted to account for differences in household size). Similarly, the Gini coefficient of 0.521 projected for 2021 indicates that the average difference in income between pairs of households would equal 104.2 percent (twice 0.521) of average household income in 2021, or about $77,800 (in 2016 dollars)."[14]: 22-24
According to CBO (and others), the precise reasons for the [recent] rapid growth in income at the top are not well understood",[27]: xi [55] but involved multiple, possibly conflicting, factors.[56][27]: xi [57]
Causes include:
Higher income households are disproportionately likely to prosper when economic times are good, and to suffer losses during downturns. More of their income comes from relatively volatile capital income. For example, in 2011 the top 1% of income earners derived 37% of their income from labor, versus 62% for the middle quintile. The top 1% derived 58% of their income from capital as opposed to 4% for the middle quintile. Government transfers represented only 1% of the income of the top 1% but 25% for the middle quintile; the dollar amounts of these transfers tend to rise in recessions.[16]
According to a 2018 report by the Organization of Economic Cooperation and Development (OECD), the US has higher income inequality and a larger percentage of low income workers than almost any other advanced nation because unemployed and at-risk workers get less support from the government and a weak collective bargaining system.[93]
Effects[edit]
Economic[edit]
Income inequality may contribute to slower economic growth, reduced income mobility, higher levels of household debt, and greater risk of financial crises and deflation.[94][95]
Public attitudes[edit]
Americans are not generally aware of the extent of inequality or recent trends.[189] In 1998 a Gallup poll found 52% of Americans agreeing that the gap between rich and the poor was a problem that needed to be fixed, while 45% regarded it as "an acceptable part of the economic system".
A December 2011 Gallup poll found a decline in the number of Americans who rated reducing the gap in income and wealth between the rich and the poor as extremely or very important (21 percent of Republicans, 43 percent of independents, and 72 percent of Democrats).[190] Only 45% see the gap as in need of fixing, while 52% do not. However, there was a large difference between Democrats and Republicans, with 71% of Democrats calling for a fix.[190]
In 2012, surveys found the issue ranked below issues such as growth and equality of opportunity, and ranked relatively low in affecting voters "personally".[191]
A January 2014 poll found 61% of Republicans, 68% of Democrats and 67% of independents accept that income inequality in the US had grown over the last decade.[192] The poll indicated that 69% of Americans supported the government doing "a lot" or "some" to address income inequality and that 73% of Americans supported raising the minimum wage from $7.25 to $10.10 per hour.[193]
Surveys found that Americans matched citizens of other nations about what equality was acceptable, but more accepting of what they thought the level was.[194] Dan Ariely and Michael Norton found in a 2011 study that US citizens significantly underestimated wealth inequality.[195]
Although some spoke out in favor of moderate inequality as a form of incentive,[294][295] others warned against excessive levels of inequality, including Robert J. Shiller, (who called rising economic inequality "the most important problem that we are facing now today"),[296] former Federal Reserve Board chairman Alan Greenspan, ("This is not the type of thing which a democratic society – a capitalist democratic society – can really accept without addressing"),[124] and President Barack Obama (who referred to the widening income gap as the "defining challenge of our time").[297]
United Nations special rapporteur Philip Alston, following a fact finding mission to the United States in December 2017, said in his report that "the United States already leads the developed world in income and wealth inequality, and it is now moving full steam ahead to make itself even more unequal."[298][299]
Alan Krueger summarized research studies in 2012, stating that as income inequality increases:[3]
Many economists claim that America's growing income inequality is "deeply worrying",[124] unjust,[64] a danger to democracy/social stability,[147][145][146] or a sign of national decline.[162] Nobelist Robert Shiller after receiving the award stated, "The most important problem that we are facing now today, I think, is rising inequality in the United States and elsewhere in the world."[300] Piketty warned, "The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century's globalized economy."[301] Angus Deaton asserts that the prevailing orthodoxy which promotes the idea of unfettered free markets and limited government intervention helped to establish a predatory capitalist system in the US that enriches corporations and the wealthy at the expense of the working class.[302]
Others claim that the increase is not significant,[303] that America's economic growth and/or equality of opportunity should be the primary focus,[304] that rising inequaity is a global phenomenon that would be foolish to try to change through US domestic policy,[305] that it "has many economic benefits and is the result of ... a well-functioning economy",[217] and has or may become an excuse for "class-warfare rhetoric".[303] They argue against "redistribution of wealth", instead advocating for "sound economic policy to reduce poverty [which] would lift people out of poverty (increase their productivity) while not reducing the well-being of wealthier individuals".[217]