Tuesday, June 29, 2010

The Dreadful Growing Income Gap

Using data released on June 17, 2010, by the Congressional Budget Office, the Center on Budget and Policy Priorities released a paper entitled “Income Gaps Between Very Rich and Everyone Else More Than Tripled in Last Three Decades, New Data Show.”

The CBO raw data encompass income, taxes, and after-tax income during 1979-2007 segregated by income categories: top 1%, 5%, 10%, 20%, and the four bottom quintiles. The CBPP compiled chartes comparing the top 1% with the highest, middle, and bottom fifths. The plotted lines show the top 1% enjoyed an increase of 281% in after-tax income during 1979-2007, while the other three quintiles recorded 95%, 25%, and 16% respectively.

It is instructive to break down the years into presidential administrations. During the Reagan years (1981-88), the after-tax income of the top 1% rose from 9.1% to 13.3%. This can be attributed in part to tax-rate reductions. During Bush 41 (1989-1992), the share was largely unchanged from 12.5% to 12.3%. Could this be due to Bush’s 1991 increase in the top marginal rate from 28% to 31%, reversing Reagan’s top 28% rate?

The Clinton years (1993-2000) are mysterious. The top 1% experienced an increase in after-tax income from 11.9% to 17.8%. This is a whopping 49.6%. This occurred despite the addition of two higher rates of 36% and 39.6% added to personal income taxes. Does this means that higher tax rates worsened (from an egalitarian point of view) the income distribution? Or that the tax rates were not high enough? Or that other factors worsened the distribution, such as the dot.com boom that paid a premium to entrepreneurship and high-tech training?

Bush 43 (2001-09) inherited the dot.com bust, which reduced the share of after-tax income of the top 1% to 14.7%, a significant decline. That share remained stagnant until 2004, thence rising sharply to 19.4% in 2007, somewhat above the Clinton peak. This rise reflects gains in Wall Street more than the Bush tax cuts. In several years the CBO will release results for 2008-09, indicating if the financial crisis reduced the share accruing to the top 1%.

To summarize: A 28-year chart comparing the first and last years hides more than it discloses, especially if the intent is to attribute the gap to tax-rate reductions, an argument intended to buttress the call for higher tax rates on the wealthy.  In that regard, the Clinton years of higher tax rates on the rich look as bad as those of Bush 43.

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