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While income inequality has increased dramatically over the past 30 years, it’s declined since 2007 and wealth inequality is actually lower than it was in 1995 – raising questions about the link between inequality and the current unemployment rate.

Associated Press

A new report puts an even finer point on changes in inequality.

“Basically,” the report finds “income inequality hasn’t changed in 25 years.”

The study, by Ronald M. Schmidt, of the William E. Simon Graduate School of Business Administration University of Rochester, challenges the recent CBO report that found that income inequality expanded dramatically between 1979 and 2007. That report said the incomes of the top 1% grew by 275% over the period, while incomes for most Americans grew by 40% or less.

Schmidt’s study said that most of the CBO’s cited growth in inequality happened between 1979 and 1986. “Most of the increase from 1979 and 2009 had occurred by 1986,” he writes.

Any increases in inequality during the 2000s was “wiped out” by the current recession, which saw incomes at the top fall more than the rest as of 2009. “In fact,” he writes, “there was a marked decline in income inequality over the entire decade” of the 2000s.

I should note that the post-2009 data may tell a different story. Inequality may well have dipped temporarily in 2009 but rebounded with stock markets in 2010 and 2011. Inequality may actually be higher today than it was in 2007. And even if it’s not, inequality in America is still high compared to other developed countries.

But as Schmidt points out, the most current data shows that the difference in average after-tax incomes between those making more than $500,000 and those making less than $500,000 was $1.5 million in 2000. That distance shrunk by $450,000 by 2009.

“A careful analysis reveals no significant deterioration in economic inequality that could serve as a pretext for raising taxes,” Schmidt argues.

Do you think “rising” inequality is a good reason to raise taxes on the rich?

Source: http://blogs.wsj.com/wealth/2011/12/06/report-inequality-hasnt-changed-in-25-years/

Thoughts:

  • The main argument that inequality is not rising is an interesting one. One needs to remember, though: this does not mean that inequality is a myth. It means that income inequality has always been a problem.
  • Linking unemployment to inequality is erroneous. especially in the context of the current recession.  The first ones to lose jobs as the market collapsed were not minimum-wage earners, but people in Wall Street. And that was followed by recessionary pressures, not because jobs were lost, but because the financial industry collapsed after years of bad banking practices.The economy spiraled down and more jobs were lost. It didn’t happen because of inequality. I happened because that’s what happens during a recession. Unemployment is an artifact, not the problem that directly stems from inequality, but often tends to correlate as it coexists.
  • Inequality is loosely connected to the taxation system.

According to Congressional Budget Office estimates, the federal tax system is a progressive tax system for earners all but the richest 1% of Americans. According to the CBO study, the lowest earning 20% of Americans (24.1 million households earning an average of $15,900 in 2005) paid an effective federal tax rate of 3.9%, when taking into account income tax, social insurance tax, and excise tax. The highest earning 5% (5.8 million households earning an average of $520,200 in 2005) paid an effective federal tax rate of 21.5%. However, the highest earning 1% of Americans (1.1 million households earning an average of $1,558,500 in 2005) paid an “effective” federal tax rate of 21.3%.

So, the taxation system becomes regressive only when we consider the highest earning 5% of Americans. But they are not the ones with foreclosed homes, and empty bank accounts.

  • Frank Robert asks whether taxing the richest is a way to reduce inequality. The solution is not to just tax the super rich, the solution is to redistribute that to the poor. However, redistribution to the poor should involve more than providing funds to institutions such as TANF.

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