The Rise of Income Inequality in the United States

When a candidate like Bernie Sanders promises free health care and free education, many Americans have jumped at the idea of voting for him. Why? Many Americans feel something radical must happen in order to turn wealth inequality around. Here are 3 Trends in wealth inequality in the United States.

  1. Income inequality in the United States has followed a U-shaped trend since 1913.
  • The low-point in the wealth inequality graph occurs right around 1980. This shows that income equality was its lowest at that point than it was in the last hundred years.
  • Most of the growth in the top 10% and top 1% can be attributed to the growth of the top 0.1%. The top 0.1%’s share of wealth has risen from 7% in the late 1970s to 22% in 2012 (most recent data available).
  • The rise of the top 1%’s concentration of taxable income rises dramatically at the time of the Tax Reform Act of 1986
    • This change reflects changes in tax avoidance rather than in the distribution of true economic value

2.  The wealth share of the bottom 90% has followed an inverted U evolution.

  • This trend is inversely proportional to the top 1% of Americans.
  • The bottom 90%’s wealth concentration was 15% in 1920, 35% in mid 1980s, and back down to 23% in 2012.
  • Wealth concentration and income concentration dramatically decreased in the 1930s and 1940s
    • The most likely explanation is the policy changes of the New Deal set by President Franklin Delano Rosevelt.
  • Wealth concentration for the bottom 90% of Americans decreased substantially in 2008 after housing crisis
    • Bottom 90% wealth concentration fell from 28.4% to 25.4% from mid 2007 to mid 2008 and fell 0.6% each year until 2012. Since the housing crisis, the top 1%’s wealth concentration has increased 5.9% each year and the top 0.1%’s wealth concentration has increased 7.9% each year (until 2012).

3.  The increased concentration of wealth at the top is driven by surging top incomes.

  • The top 0.01%’s wealth share has been growing at 7.88% since 1988. A top 0.01% family was 220 times richer than the average family in 1978. A top 0.01% individual or family was 1120 times richer in 2012. Growth at the top is driven by an increase in fixed income (mainly bonds and saving deposits) and corporate equities.
  • Income earned from labor has increased substantially for the the 0.1% of earners as well. Before 1970, the top 0.1% earners earned slightly less than 0.5% of all labor income, in 2012 that number was 3.1%. Pre-tax income has surged from 3% in 1960 to 8% in 2012 for the top 0.1%.
  • A rise in labor income can be attributed to the following:
    • A rise in young wealthy individuals receiving their parent’s/guardian’s inheritances
    • Self-made wealth may be stabilizing. The share of labor income seems to have peaked in 2000. This indicates that entrepreneurial wealth may be establishing itself into established wealth
    • The rise of labor share in top wealth holders doesn’t capture the fact that many individuals are more likely to be working today than in the past, it captures growing labor income inequality
      • This is due to the rise in concentration of labor income at the top, not an increase in the fraction of individuals who belong at the top of both the wealth and labor income concentrations

Even if you don’t agree with his policies, it makes sense why some Americans, especially young and indebted Americans, are choosing to vote for Bernie Sanders.

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