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Over the last 30 years, the top income tax rate has averaged about 40%. It’s now at 35%, one-half of the 70% rate in effect throughout the 1970s. It was even higher, at 90% in the 1950s and early 1960s, before being reduced to 70% in 1965. As we discuss (Stable Income Inequality), these lower-than maximum income tax rates were an instrumental factor, together with the other two pillars of Reaganomics [1], in greatly increasing income and wealth inequality, with disastrous consequences for the economy and for the bottom 99%.

Income Inequality levels track the top tax rate.

Here again is the graph showing the top tax rate over time:

Notice that the top tax rate reductions from 1921 until 1931, the beginning of the Great Depression, closely resemble the reductions that began 30 years ago, in 1981.

The following graph [2] shows the percentage of total income going to the top 10% over the years:

Just before the Great Depression, in 1928, the top 10% earned almost one-half of all income. For 40 years, roughly 1942-1982, the top 10% consistently took in about 33-34% of income (while the top income tax rate was at least 70%). This was the modern period of American prosperity.

As would be expected, the pattern is similar for the top 1%, as shown in the next graph:

In 1928, the top 1% was taking in 23.9% of earnings. With that degree of inequality, there was not enough income and wealth and available within the rest of the population (the bottom 99%) to sustain prosperity. In 1976, just before the Reagan Revolution, the top 1% was taking in 8.9%.

The top tax rate becomes too low to maintain stable income inequality.

With the lowering of the top income tax rate in 1981, the percentage of income of both the top 10% and the top 1% began to increase sharply, and by 1986 their shares of income were 40% and 15%, respectively. At the beginning of the Clinton Administration, another sharp increase began, and the top 10% moved to over 47% by 1998 and the top 1% rose to 22%. By 2007, the figure for the top 10% was back 50%, where it had peaked 80 years earlier. And the top 1%, similarly, was back near the 1928 level, at 23.5%.

Note that “[t]he same pattern held for the richest one-tenth of 1% (representing about 13,000 households in 2007): Their share of total income also peaked in 1928 and 2007, at over 11%.” [4]

So here was the situation in 2007:

Percentile % of Total Income

Top 0.1% 11%

Top 1 % 23.5%

Top 10% 50%

Let’s reflect on these numbers: The top 10% has as much income as everybody else; and one-half of what comes in to the top 10% goes to the top 1%. And the income of the top 1% is heavily concentrated at the very top.

In effect there are increasingly two economies, a wealthy “top” economy doing very well, and a “bottom” economy for roughly the bottom 99% facing income stagnation, with dwindling wealth and resources.

Only the wealthy few have had income growth in the last 30 years.

This next graph [5] shows rapidly increasing income growth for the top 1% in the past ten years. It also shows that for the entire bottom 60% there has been very little growth in per household income over the last 30 years, well under 1% annually.

Even the highest fifth (top 20%) has averaged less than what had previously been average GPA growth rate over the prior 40 years of a little over 3%. And the bottom half of the top 20% did poorly, because the top 1% did so well that it raised the average for the top 20%. That means that over the past 30 years only people roughly within the top 10% were able to realize any growth in real income.

Robert Reich puts it this way:

The wages of the typical American hardly increased in the three decades leading up to the Crash of 2008, considering inflation. In the 2002, they actually dropped. According to the Census Bureau, in 2007 a male worker earning the median male wage (that is, smack in the middle, with as many men earning more than he did as earning less) took home just over $45,000. Considering inflation, this was less than the typical male worker earned thirty years before. * * * But the American economy was much larger in 2007 than it was 30 years before. If those gains had been divided equally among Americans, the typical American would be more than 60 percent better off than he actually was by 2007. [6]

Since 2002, at the time of the GW Bush tax cuts for the top 2.5%, the top 1% has increased after tax income by more than 2.5x (unadjusted for inflation). This fact is crucial, for it was devastating for the underlying economy, which could not sustain itself and collapsed in 2008.

As shown in this graph, within the top 10% the top 1% is taking in most of the growth. From the mid-1990s to 2007, incomes in the lower half of the top 5% grew modestly, while the 5-10% range stayed about the same. So, today, even the bottom half of the top 10% is not experiencing growth, and is barely holding on. [7] Clearly, income and therefore wealth is being absorbed by the top 1% at a phenomenal rate.

As Reich pointed out, “[t]he American economy was much larger in 2007 than it was 30 years before.” However, inequality has increased so much that the real, functioning economy for the bottom 99% – the one we all live and work in – is actually smaller, with less economic activity and real GDP than 30 years earlier.

It’s also important to remember that almost all of the growth in incomes over the last 30 years has gone to the top 1%, and its income has grown by 2.5x. Moreover, almost half of the growth in the top 1% has accrued within the top .1% over the last 30 years. Within that group, therefore, income and wealth have grown astronomically, especially over the last ten years.

That said, it’s still difficult to imagine the degree of inequality concentration displayed in this graph [8]:

Incredibly, in 2000 and 2006, the average family incomes in the top 0.1% are far higher than in the rest of the top 1%, which more closely resembles the top 5%. The top 0.01% has 6-7 times the average income of the rest of the top 0.1%, and more importantly, its income is growing about 3 times faster!

Overall growth has been suppressed, and the middle class has significantly declined over the past 30 years.

This graph [9] is revealing. Before the last 30 years, the top 1% was increasing its income (unadjusted for inflation) by about 7% per year. Everyone in the bottom 99%, however, was doing even better. The lowest quintile was actually improving the fastest: Of course, the rich were rich and the poor were poor, but the economy was growing, and this was a period of great stability in the distribution of incomes.

Beginning with the Reagan Revolution, however, there is much lower annual economic growth overall. Only the top 1% has maintained a growth rate over 1%. The entire top 20% (which includes the top 1%), however, could barely keep up with inflation.

For the “middle class” as Robert Reich defines it (the middle three quintiles), real incomes in the last 30 years have declined. What is functionally left of the middle class (people who still feel reasonably unaffected by economic decline) are somewhere in the top 10%, and as we noted earlier, mainly in the top 5%.

Robert Reich sums up this situation well:

Growth… is a means to better lives for all, generating not only higher incomes and possibilities for more personal consumption but also making room for the consumption of public improvements that benefit us all – and atmosphere less polluted by carbon, good schools, better health care. Rapid growth also smooths the way toward the basic bargain: When the economy is growing nicely, the wealthy more easily accept a smaller share of the gains because they can still come out ahead of where they were before. Simultaneously, when everyone else enjoys a larger share, they more willingly pay taxes to support public improvements. It’s a virtuous cycle. Slow or no growth has the reverse effect. Economic gains are so meager that the wealthy fight harder to maintain their share. The middle class, already burdened by high unemployment and flat or dropping wages, fights ever more furiously against any additional burdens, such as tax increases to support public schools or price increases resulting from regulations limiting carbon emissions. It’s a vicious cycle. [10]

The question becomes how “to restore the widespread prosperity needed for growth, and how to get the growth necessary for widespread prosperity.” [11] It will certainly take great political will. Government is currently mostly controlled by the forces of wealth devoted to increasing and exercising their power, and demonstrably dedicated to preventing that from happening. And the American people are not yet geared up for the fight.

JMH – 4/2/11

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[1] As we have noted, in addition to cutting taxes for the rich, Reaganomics seeks to reduce government regulation of business, and government social spending. The former increases the distribution of wealth to the top, and the latter decreases the redistribution of wealth back down the income ladder. These factors have a huge impact on wealth distribution.

[2] Numerous sources: See ataxingmatter.blogs.com http://ataxingmatter.blogs.com/tax/democratic_egalitarianism/

[3] Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” Quarterly Journal of Economics, 118(1), 2003. Updated to 2007 at http://emlab.berkeley.edu/users/saez. From econfix.wordpress.com, extremeinquality.org

[4] Robert Reich, Aftershock: The Next economy and America’s Future, John Wiley & Sons, 2010, p. 20.

[5] Meanmesa.com

[6] From vagabondscholar.blogspot.com http://vagabondscholar.blogspot.com/2010/07/attack-of-plutocrats.html

[7] Aftershock, supra. at 19.

[8] Seekingalpha.com

[9] From iTulip.com http://www.itulip.com/incomedistribution.htm , where the conclusion is affirmed that “persistent inequality leads to lower economic growth.”

[10] Aftershock, supra. at 75-76.

[11] Ibid.

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