Bobby Scott says U.S. income disparity is widest since 1920s

30 Jun 2015 | Author: | No comments yet »

Bobby Scott says U.S. income disparity is widest since 1920s.

Incomes for the bottom 99 percent of American families rose 3.3 percent last year to $47,213, the biggest annual gain in the past 15 years, according to data compiled by economist Emmanuel Saez and released Monday by the Washington Center for Equitable Growth. “For the bottom 99 percent of income earners, this marks the first year of real recovery from the income losses sparked by the Great Recession,” Saez, a professor at the University of California-Berkeley, said in a summary of his findings. As of 2014, the top 1 percent of Americans have seen 58 percent of the gains in the economic recovery, while the average real income of the bottom 90 percent has grown just 1.6 percent since the recovery began in 2009.* These findings coincide with new data from the IRS showing that the top 0.01 percent received 5.6 percent of adjusted gross income in 2012.

Similar claims have been sounded this year from both sides of the political aisle and uttered by two presidential candidates who, otherwise, are light years apart: Sens. The first, published earlier this year by the Center on Budget and Policy Priorities, is a guide to statistical studies on income inequality published by other organizations, including the U.S. Between 1981 and 1990, overall income grew 1 percent per year—not quickly but nonetheless a welcome change from the negative real income growth of the late 1970s. But there was a problem: most of research didn’t go back much further in time and to get to the bottom of Scott’s claim, we had to travel back nearly 100 years.

Saez and other economists built a database that compiles historic disparity statistics from 30 nations using data from millions of individual tax returns filed over the years. From 2001 to 2007, overall incomes continued to grow at the same rate as they did in the 1990s, but middle-class incomes grew at less than one-sixteenth of the overall rate. The share of income captured by the wealthiest top 10 percent is now higher than what it was in 1928, “the peak of stock market bubble in the ‘roaring’ 1920s,” as Saez notes. Saez says the 2012 share may have been a slight aberration, in part because many high earners cashed investments to avoid an increase in the capital gains tax that took effect the following year. The economy could withstand far higher tax rates on the wealthiest, and a 90 percent rate would both reduce inequality and also boost government tax revenue.

Income certainly has shifted upward, but its benefits have failed to materialize for everyone else; middle-class incomes after 1980 only displayed strong positive growth in the late 1990s. Saez’s figures are compiled from IRS tax data, using pre-tax income that excludes government transfer payments, such as Social Security retirement income. While Saez’s work has become a popular source for politicians to cite when discussing income disparity, some economists are critical of his measurements. The only period that boasted overall income growth above 1 percent without strong middle-class income growth was the 2000s, and this growth was the result of an unsustainable housing bubble that greatly reduced overall income when it could no longer continue.

He noted that Saez’s income data is limited to pre-tax private income including wages, self-employment earnings, dividends, interest, rental payments and, in some cases, capital gains. International organizations such as the International Monetary Fund and the Organisation for Economic Co-operation and Development, or OECD, have concluded that high levels of income inequality reduce economic growth. When the middle class has no money, businesses have no customers: As shown in a 2014 Center for American Progress report, more than two-thirds of retailers cited stagnant or shrinking disposable incomes as a risk factor for their stock prices.

The wealthy tend to save their money, which helps finance investment, but 0 percent interest rates prove that financial markets have more savings than they can invest. Saez, in comparison, computed the disparity at 16.7 percent and 17.5 percent for the same two years — an average of about 3 percentage points higher than the CBO. It shows that, with one exception, the sixteen highest years of disparity between the top one percent of earners and others occurred before 1930 or after 2004. But it’s worth noting that the data tends to understate income because it doesn’t consider major government and employee benefits that weren’t offered until the 1940s or later.

Healthy economic growth requires a healthy middle class, and a pro-growth policy agenda needs to focus squarely on everyday Americans. * Saez’s data use tax returns to measure “cash market income”—income received from wages, business, and capital. This definition of income is useful for evaluating how the market distributes rewards, though it does not reflect the total amount of resources available to tax units.

However, there are clear advantages to using Saez’s data to study and compare the current business cycle to past business cycles: They are more recent and go much further back, allowing comparison of post-1980 business cycles with other business cycles after World War II.

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