Income Gap Is at All-Time High; Tax Cuts Concentrate Wealth

    The gap between wealthy and poor Americans reached an all-new high in 2006, recent figures reveal. A release from the Wall Street Journal using Internal Revenue Service (IRS) data shows that the concentration of wealth currently exceeds the most recent record high of 2000, marks the widest gap in 25 years, and has academic researchers citing the boom of the 1920s as the only comparable precedent for economic inequality in the United States.

The Wall Street Journal report offers the following based on IRS data:
        -    The wealthiest 1 percent of Americans earned 22.1 percent of all income in 2005, a
        sharp increase from 19 percent in 2004, and above the year 2000 record of 20.8 percent.
        -    The bottom 50 percent of Americans earned 12.8 percent of the income, down from
        13.4 percent in 2004 and still less than 13 percent in 2000.

    The IRS data, drawn from 132.6 million tax returns, concentrates on “adjusted gross income”—income after deductions, alimony, Individual Retirement Accounts. It compares these data back to 1986. The data include those who did not earn enough to owe any taxes.

    The wealthiest 1 percent of Americans in 2005 earned at least $364,657. In contrast, the official poverty line for a two-person household was set at $12,755. The poorest 12 percent  of Americans—close to 37 million in 2005—had income under the poverty line.

    Fueling this income disparity are the Bush administrations tax cuts for the wealthiest Americans. A study published last winter, in the Journal of Economic Perspectives, “How Progressive Is the U.S. Federal Tax System? A Historical and International Perspective” by Thomas Piketty and Emmanuel Saez, concludes that not only does the United States have a relatively low tax burden but also in a few years our generally progressive tax system may become “flat.”

    According to projections by the Urban Institute, in 2010, when those tax cuts will take full effect, households with annual incomes of more than $1 million will receive after-tax income boosts of about 7.6 percent. Middle-income earners, who are increasingly subjected to taxes meant to affect the rich, such as the alternative minimum tax, will see a 2.3 percent increase in after-tax incomes. Lower-income earners burdened by sales, property, lottery, and income tax will experience no gain in income, as well as face an uncertain future as the growing federal budget deficit threatens programs assisting millions of working families.

    In an interview with the Wall Street Journal, President Bush said, “First of all, our society has had inequality for a long time. Secondly, skills gaps yield income gaps.” Thus the president shrugs off the size and rapid growth of the income disparity as “normal.” He highlights the skill gaps as a cause for the inequality but ignores the role of inherited wealth and the other inherent advantages of wealth and disadvantages of poverty. Lack of federal support for programs that minimize these gaps is also to blame.

    The Bush administration, having fueled income disparities through the tax cuts, also has fueled a federal budget deficit with those same tax cuts. And then the president cited the deficit as one of the reasons why he vetoed the State Children’s Health Insurance Program—just one of many programs threatened by the budget deficit. That veto, at least for the time being, killed yet another effort to help lower-income working families make ends meet. In this case, children are denied the opportunity of having a healthy start in life. Both the tax cuts and the program cuts will worsen income disparities. 

    For more information on the income gap, read “New Data Show Income Concentration Jumped Again in 2005,” by Aviva Aron-Dine, Center on Budget and Policy Priorities, March 29, 2007.

For more information on the reports cited in this article, contact Natasha Eziquiel-Shriro at 312.263.3830 ext. 242.