Income Inequality in America

Following up on an earlier comment on taxes and teabaggers, I wanted to pass along two charts showing how the historical drop in tax rates on the wealthy has contributed to growing inequality. First, notice the median after-tax income growth in real (2006, inflation-adjusted) dollars for that 27-year span:

As percentage growth:

Paul Krugman wrote in Rolling Stone in 2003,

According to the federal Bureau of Labor Statistics, the hourly wage of the average American non-supervisory worker is actually lower, adjusted for inflation, than it was in 1970. Meanwhile, CEO pay has soared — from less than thirty times the average wage to almost 300 times the typical worker's pay.

The widening gulf between workers and executives is part of a stunning increase in inequality throughout the U.S. economy during the past thirty years. To get a sense of just how dramatic that shift has been, imagine a line of 1,000 people who represent the entire population of America. They are standing in ascending order of income, with the poorest person on the left and the richest person on the right. And their height is proportional to their income — the richer they are, the taller they are.

Start with 1973. If you assume that a height of six feet represents the average income in that year, the person on the far left side of the line — representing those Americans living in extreme poverty — is only sixteen inches tall. By the time you get to the guy at the extreme right, he towers over the line at more than 113 feet.

Now take 2005. The average height has grown from six feet to eight feet, reflecting the modest growth in average incomes over the past generation. And the poorest people on the left side of the line have grown at about the same rate as those near the middle — the gap between the middle class and the poor, in other words, hasn't changed. But people to the right must have been taking some kind of extreme steroids: The guy at the end of the line is now 560 feet tall, almost five times taller than his 1973 counterpart.

Just for s's and g's, I decided to plot Krugman's numbers and make two charts. He didn't give a specific number for the growth in the poor income, so I used the exact same percentage growth to calculate its change as for the median income -- 33% -- because he said "the gap between the middle class and the poor, in other words, hasn't changed":


And in percentage terms:

The takeaway lesson? Rich people's incomes quadrupled during that period in real terms while the rest of us nudged up by a third of their original amount. The old saying, "A rising tide lifts all boats," is true, but a yacht gets lifted about 13 times the amount that a dinghy or life raft does.

Both tax cuts and tax increases represent a "redistribution of wealth" for all earners. The former increases income inequality -- making the rich richer and the poor poorer -- the latter increases employment and opportunity for 99% of us -- decreasing inequality.