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Wealth inequality in the United States

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A chart demonstrating increases in the annual income of the top 1% of wealthy persons in the U.S. before the economic crises.[1]

Wealth inequality in the United States, also known as the "wealth gap", refers to the unequal distribution of financial assets among residents of the United States. Wealth includes the values of homes, automobiles, businesses, savings, and investments.[2] Those who acquire a great deal of financial wealth do so primarily through the appreciation of fiscal portfolios. For this reason, financial wealth involves only stocks and mutual funds, and other investments. Hence, there is greater financial inequality than simple net worth disparities. Various sociological statistics suggest the severity of wealth inequality "with the top 10% possessing 80% of all financial assets [and] the bottom 90% holding only 20% of all financial wealth."[3] Although different from income inequality, the two are often interrelated.

Melvin L. Oliver and Thomas M. Shapiro propose that wealth signifies the opportunity to “make it” in life; wealth is not used for daily expenditures or factored into a budget but when coupled with income it comprises the family’s total opportunity “to secure a desired stature and standard of living, or pass their class status along to one’s children”.[4] Moreover, “wealth provides for both short- and long-term financial security, bestows social prestige, and contributes to political power, and can be used to produce more wealth."[5] Hence, wealth possesses a psychological element that awards people the feeling of agency, or the ability to act. The accumulation of wealth grants more options and eliminates restrictions about how one can live life. Dennis Gilbert asserts that the standard of living of the working and middle classes is dependent upon income and wages, while the rich tend to rely on wealth, distinguishing them from the vast majority of Americans.[6]

Statistics

According to the Congressional Budget Office, between 1979 and 2007 incomes of the top 1% of Americans grew by an average of 275%. ... (Note: The IRS insists that comparisons of adjusted gross income pre-1987 and post-1987 are complicated by large changes in the definition of AGI [7]) ... During the same time period, the 60% of Americans in the middle of the income scale saw their income rise by 40%. Since 1979 the average pre-tax income for the bottom 90% of households has decreased by $900, while that of the top 1% increased by over $700,000, as federal taxation became less progressive. From 1992-2007 the top 400 income earners in the U.S. saw their income increase 392% and their average tax rate reduced by 37%.[8] In 2009, the average income of the top 1% was $960,000 with a minimum income of $343,927.[9][10][11]

In 2007 the richest 1% of the American population owned 34.6% of the country's total wealth, and the next 19% owned 50.5%. Thus, the top 20% of Americans owned 85% of the country's wealth and the bottom 80% of the population owned 15%. Financial inequality was greater than inequality in total wealth, with the top 1% of the population owning 42.7%, the next 19% of Americans owning 50.3%, and the bottom 80% owning 7%.[12] However, after the Great Recession which started in 2007, the share of total wealth owned by the top 1% of the population grew from 34.6% to 37.1%, and that owned by the top 20% of Americans grew from 85% to 87.7%. The Great Recession also caused a drop of 36.1% in median household wealth but a drop of only 11.1% for the top 1%, further widening the gap between the 1% and the 99%.[12][13][14] During the economic expansion between 2002 and 2007, the income of the top 1% grew 10 times faster than the income of the bottom 90%. In this period 66% of total income gains went to the 1%, who in 2007 had a larger share of total income than at any time since 1928.[citation needed]

Wealth and income

There is an important distinction between income and wealth. Income refers to a flow of money over time in the form of a rate (per hour, per week, or per year); wealth is a collection of assets owned. In essence, income is specifically what people receive through work, retirement, or social welfare whereas wealth is what people own.[15] While the two are seemingly related, income inequality alone is insufficient for understanding economic inequality for two reasons:

  1. It does not accurately reflect an individual’s economic position
  2. Income does not portray the severity of financial inequality in the United States.

The United States Census Bureau formally defines income as “received on a regular basis (exclusive of certain money receipts such as capital gains) before payments for personal income taxes, social security, union dues, medicare deductions, etc.[16] By this official measure, the wealthiest families have low income but the value of their assets earns enough money to support their lifestyle. Dividends from trusts or gains in the stock market do not fall under the definition of income but are the primary money flows for the wealthy. Retired people also have little income but usually have a higher net worth because of money saved over time.[17]

Additionally, income does not capture the extent of wealth inequality. Wealth is derived over time from the collection of income earnings and growth of assets. The income of one year cannot encompass the accumulation over a lifetime. Income statistics view too narrow a time span for it to be an adequate indicator of financial inequality. For example, the Gini coefficient for wealth inequality increased from 0.80 in 1983 to 0.84 in 1989. In the same year, 1989, the Gini coefficient for income was only 0.52.[17] The Gini coefficient is an economic tool on a scale from 0 to 1 that measures the level of inequality. 1 signifies perfect inequality and 0 represents perfect equality. From this data, it is evident that in 1989 there was a discrepancy about the level of economic disparity with the extent of wealth inequality significantly higher than income inequality.

Causes of wealth inequality

Some primary causes contributing to the creation and persistence of wealth inequality include:

  1. Financial Resources
  2. Money Allocation
  3. Higher rate of savings and hence asset accumulation by the wealthy
  4. Higher net rate of return to assets owned by the rich (the wealthy may have special knowledge, and the level of fees and other charges on their savings will be less than those with small investments)
  5. Lower credit costs and credit constraints for the wealthy. Access to credit at lower rates enhaces the level of profits and scope of investment opportunities
  6. Inflation
  7. Tax Policy

Essentially, the wealthy possess greater financial opportunities that allow their money to make more money. Earnings from the stock market or mutual funds are reinvested to produce a larger return. Over time, the sum that is invested becomes progressively more substantial. Those who are not wealthy, however, do not have the resources to enhance their opportunities and improve their economic position. Rather, “after debt payments, poor families are constrained to spend the remaining income on items that will not produce wealth and will depreciate over time."[18] Scholar David B. Grusky notes that “62 percent of households headed by single parents are without savings or other financial assets”.[19] Net indebtedness generally prevents the poor from having any opportunity to accumulate wealth and thereby better their conditions.

Notably, for both the wealthy and not-wealthy, the process of accumulation or debt is cyclical. The rich use their money to earn larger returns and the poor have no savings with which to produce returns or eliminate debt. Unlike income, both facets are generational. Wealthy families pass down their assets allowing future generations to develop even more wealth. The poor, on the other hand, “are less able to leave inheritances to their children leaving the latter with little or no wealth on which to build…This is another reason why wealth inequality is so important- its accumulation has direct implications for economic inequality among the children of today’s families."[18]

Corresponding to financial resources, the wealthy strategically organize their money so that it will produce profit. Affluent people are more likely to allocate their money to financial assets such as stocks, bonds, and other investments which hold the possibility of capital appreciation. Those who are not wealthy are more likely to have their money in savings accounts and home ownership.[20] This difference comprises the largest reason for the continuation of wealth inequality in America: the rich are accumulating more assets while the middle and working classes are just getting by. Currently, the richest 1% hold about 38% of all privately held wealth in the United States.[3] while the bottom 90% held 73% of all debt.[18]

As the price of commodities increases because of inflation, a larger percentage of lower class people's money is spent on things they need to survive and go to work, such as food and gasoline. Most of the working poor are paid fixed hourly wages that do not keep up with rises in prices, so every year an increasing percentage of their income is consumed until they have to go into debt just to survive. At this point, their little wealth is owed to lenders and banking institutions.

Main article: Tax Policy and Economic Inequality in the United States

The distributive nature of tax policy has been suggested by some economists and politicians such as Emmanuel Saez, Thomas Piketty, and Barack Obama to perpetuate economic inequality in America by steering large sums of wealth into the hands of the wealthiest Americans. This claim has created much controversy and debate within the academic and political spheres.

Racial disparities

When it comes to identifying issues that create and contribute to ongoing wealth inequality in the United States, it is also important to observe issues that surround the disparity in wealth between different racial groups. There are many factors involved, but inheritance might be the most important factor. Direct transfer of unused wealth/resources from a parent to a child provides them the opportunity to pay off debts and increase equity.

Inheritance therefore takes on a special meaning when considering the wealth gap between blacks and whites in today’s world because it can directly link the disadvantaged economic position and prospects of today's blacks to the disadvantaged positions of their parents' and grandparents' generations. According to a report done by Robert B. Avery and Michael S. Rendall, one in three white households will receive a substantial inheritance during their lifetime compared to only one in ten black households.[21]

This relative lack of inheritance that has been observed among African Americans can be attributed in large part to factors such as- unpaid labor (slavery), violent destruction of personal property in incidents such as Red Summer of 1919, unequal opportunity in education and employment (racial discrimination), and more recent policies such as redlining and planned shrinkage. To put it succinctly a relative lack of accumulated wealth can be attributed in large part to Racism in the United States.[citation needed] Other ethnic minorities, particularly those with darker complexions, have at times faced many of these same adversities to various degrees. [22]

See also

References

  1. ^ The Paris School of Economics World Top Incomes Database
  2. ^ Hurst, Charles E. (2007), Social Inequality: Forms, Causes, and Consequences, Pearson Education, Inc., p. 31, ISBN 0205698298
  3. ^ a b Hurst, page 34
  4. ^ Grusky, David B. ‘’Social Stratification: Class, Race, and Gender in Sociological Perspective’’, page 637. Westview Press, 2001 ISBN 0813366542
  5. ^ Keister, page 64
  6. ^ Gilbert, D. (1998). The American Class Structure: In an Age of the Growing Inequality. Belmont, CA: Wadsworth.
  7. ^ led to households in the top income quintile reporting a lot more of their income in their individual income tax form's AGI, rather than reporting their business income in separate corporate tax returns, or not reporting certain non-taxable income in their AGI at all, such as municipal bond income. Anyone who wants to discuss incomes in the U.S. fairly must include a chart of all available data split by quintile up to the mid-1980's. That should be followed by a chart from 1990 to 2011. The five year gap would avoid the major AGI definition changes. The big picture of this subject is not just a segment of all available data starting in 1979, especially after the IRS warned about the large AGI definition changes in the late 1980's). In addition, IRS studies consistently show a majority of households in the top income quintile have moved to a lower quintile within one decade. There are even more changes to households in the top 1%. Without including those data here, a reader is likely to assume households in the Top 1% are almost the same from year to year.
  8. ^ It's the Inequality, Stupid By Dave Gilson and Carolyn Perot in Mother Jones, March/April 2011 Issue
  9. ^ Who are the 1 percent?, CNN, October 29, 2011
  10. ^ "Tax Data Show Richest 1 Percent Took a Hit in 2008, But Income Remained Highly Concentrated at the Top." Center on Budget and Policy Priorities. Accessed October 2011.
  11. ^ Top Earners Doubled Share of Nation’s Income, Study Finds New York Times By Robert Pear, October 25, 2011
  12. ^ a b Occupy Wall Street And The Rhetoric of Equality Forbes November 1, 2011 by Deborah L. Jacobs
  13. ^ Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007 by Edward N. Wolff, Levy Economics Institute of Bard College, March 2010
  14. ^ Wealth, Income, and Power by G. William Domhoff of the UC-Santa Barbara Sociology Department
  15. ^ Grusky, page 637
  16. ^ U.S. Census Bureau, Housing and Household Economic Statistics Division (December 20, 2005). ‘’Income Overview’’. Retrieved December 2, 2007, from http://www.census.gov/hhes/www/income/overview.html
  17. ^ a b Keister, page 65
  18. ^ a b c Hurst, page 36
  19. ^ Grusky, page 640
  20. ^ Hurst, page 34-35
  21. ^ Avery, Robert B.; Rendall, Michael S. (2002), Lifetime Inheritances of Three Generations of Whites and Blacks, vol. 107, The University of Chicago Press
  22. ^ Keister, Lisa A. (2004), Race, Family Structure, and Wealth: The Effect of Childhood Family on Adult Asset Ownership, vol. 47, University of California Press
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