Income Inequality

Income inequality has become a “hot” political issue in recent years. Some politicians have even run for office on the premise that they will solve this “problem”. There were even reports that income inequality has gotten much worse in recent years – especially in the United States. And there has been a lot of focus on the inequities associated with the “top 1%”. So I thought this deserved some research and analysis.

The real issue is probably not “income” inequality – it’s probably about “wealth”. Just to clarify, “income” is current cash receipts (e.g., salaries, bonuses, capital gains, etc.). Whereas “wealth” is the value of property and financial assets less debts. In the history of civilization, there has always been inequality in wealth. If you go back to ancient civilizations – like Egypt and China – it was a very small ruling class of pharaohs and emperors who controlled virtually all the wealth while the populations were impoverished and even enslaved. I believe that inequality then was a lot worse than what we have today. Moving forward in history to the time of the Roman Empire, I don’t see a significant improvement. And even later in the Middle Ages you had kingdoms where royalty controlled the wealth and the population was mostly peasants. There is no financial accountings of wealth and incomes from those historical periods, but conceptually and logically this issue of inequality is not something recent. As the world developed economically and technologically into the 19^th century, most people still lived in poverty. Then towards the end of the 19^th century we had the emergence of an extremely wealthy class of industrialists and what were called “robber barons”. This relatively small number of people had enormous wealth and influence (e.g., Vanderbilt, Rockefeller, Carnegie, etc.) – far beyond even the wealthiest of the top 1% today (adjusting for inflation).

There is a lot more data available on this from the beginning of the 20^th century up to today. Many studies have been done and here are some brief examples and conclusions:

Since the beginning of the 20th century the proportion of income in the United States that went to the top 1% of the population varied between 10 to 20%. Most of the variations during that period were due to changes in tax policy and rates. It is still running less than 20%.
The income concentration for the top 1% is approximately the same now as it was in the 1920s.
“By fully accounting for redistribution from taxes and transfers, true inequality is almost 26 percent less than it initially appears.” (Congressional Budget Office)
“The top 1 percent of tax filers earn 19 percent of U.S. income, but … they paid 37.8 percent of federal income taxes.” (Cato Institute) - while less than 3% comes from the bottom 50%.
The distribution of wealth is even more concentrated than income – the top 1% having about 39% of the total wealth in this country. Although this has risen since the 1980s, it is still below the levels reached in the 1930s.

To put this issue in perspective, it’s worth looking at it on a global basis. Research finds the following (Source: Our World in Data):

The share of total income going to the top 1% has risen in English-speaking countries (US, UK, Canada, Australia, Ireland) in recent years but still below the levels in the 1920s and 1930s.
However, the share of total income going to the top 1% in continental Europe and Japan has continually been reduced since the 1920s when it was higher than in the US. This is due primarily to the much higher levels of taxation and income redistribution in those countries.
It has been found that lower income countries tend to have higher concentrations of wealth and income inequality – e.g., Southern Africa and Latin America.

We should also look at what is behind this issue – concerns about poverty as well as the causes for income inequality.

“There is little demonstrable relationship between inequality and poverty. Poverty rates have sometimes risen during periods of relatively stable levels of inequality and declined during times of rising inequality.” (Cato Institute)
Since the 1960s the poverty rate in the US has fallen significantly – to between 10 to 15% of the population.
One factor contributing to the rise of income inequality is “skill-based technological change”. Some argue that income differences provide incentives for individual effort and achievement.

So should we really be concerned that the “Top 1%” get 10 to 20% of the income and have 30 to 40% of the wealth? Since this has been true for over 100 years and arguably there was even a higher concentration of wealth historically, I don’t understand the alarm. And this same 1% of the population pays almost 40% of the income taxes – and is probably also responsible for creating and managing millions of jobs. I don’t have the data, but this group probably also contributes a large portion of the philanthropy in this country. It’s not as if they are not contributing to the economy – they are not pharaohs, emperors, or kings. Also during the same 100 years, and even more so in recent decades, poverty in the US has declined significantly. But it’s not that there are no problems with the concentration of wealth or poverty, but in retrospect these problems are much less than they had been in the past. And I don’t think the answer is to adopt socialistic policies for the redistribution of income and wealth. We already do enough of that.

However, from a personal point of view I think the income of many corporate executives, investment bankers, professional athletes, and entertainers are outrageous. No individual is worth that much – tens if not hundreds of millions of dollars per year. A manager, for example, is not worth hundreds of times the salaries of professional employees in their organization. They’re the ones who do most of the work that creates the wealth. I’ve managed large organizations even entire corporations and I know, despite how hard I work myself or what I thought of my contributions, it was the employees who are responsible for most of the results. So there is something wrong with the compensation system, but it has to be fixed by boards of directors and consumers of the products and services involved. In the grand scheme of things we have seen that the concentration of wealth has always been there and has even been greater in the past, but that doesn’t mean that there aren’t some inequities. In general, I think that market forces can get these under control.

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