The Costs of Inequality to the Growth of Most Households’ Incomes

June 3rd, 2014 at 8:31 am

Yesterday I pointed out that adding in federal taxes and transfers does not much alter the trend in inequality over the last few decades.  This morning, I’d like to feature another look at the costs of inequality—again, after accounting for taxes and transfers—in terms of income losses to the bottom 80% of households.

The figure below, from CBPP, is constructed as follows.  Take the average after-tax income growth (in real terms) over the period covered by CBO’s comprehensive data series (1979-2010), which happens to be 58%.  Apply that value to the 1979 value of each income class—in other words, assume every household’s income grew at the average rate.  That’s the same as saying inequality was constant over these years.

Then, plot the difference between that simulated rate and the actual income value in 2010.  That value, shown in the bars below, represents the costs of inequality (incomes growing slower than average) to most households and the benefits to those at the top (income growth faster than average).

The lowest income households, those in the bottom fifth of the after-tax income scale, lost $1,500 over these years.  Middle-income households lost $9,500.  Households in the top 1%, whose incomes grew 3.5 times faster than average, gained a cool $482,000.

Occasionally I run into people who want to argue that the increase in inequality is just the benign outcome of “just desserts” as economist Greg Mankiw frames it.  It may boost those at the top, but not at the expense of others.  By this metric, not so.  The growth of unequal outcomes has been and will continue to be costly to those on the wrong side of the divide.


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7 comments in reply to "The Costs of Inequality to the Growth of Most Households’ Incomes"

  1. Tyler says:

    The House Republicans might support a federal income tax holiday for the middle class.

  2. andrea schaerf says:

    I think the structural inequality needs to be addressed head on, The remedies can be phased in so as not to disrupt individuals or business. The structural inequality perpetuates the problem and prevents the less wealthy from gaining anywhere near the wealth of income to compete.

  3. Tom in MN says:

    And it’s even worse than this because growth has been lower starting around 1980 than it was in the decades before. If you attribute this lower growth to growing inequality, that is, the complete failure of trickle down economics, then there is also an across the board loss on top of the changes in the plot because GDP is less what it would have been with a higher average growth. Inequality hurts everyone through lower GDP even if you are in a “winning” bracket.

  4. Fred Donaldson says:

    So-called “transfers” are often just band-aids on an infected sore. We know that most taxes are paid by the middle class, and many transfers are to working class Americans, who are underpaid by their employers. Transfers are a way for companies to pay less and let the government make up the difference.

    The danger to intelligent discussion is when we consider transfers as income for the recipients. Many transfers are just subsidies for business and should be identified as income for employers (and taxed as such), not income for underpaid employees.

    A $15 minimum wage for 40 hours work would virtually eliminate EITC and some other transfers, and put the responsibility on companies to pay their workers enough to eat, raise children and have some pursuit of happiness for devoting most of their time to generating revenues for someone else.

  5. Tom in MN says:

    In terms of a percentage of the 2010 Mean income for those quintiles:

    Bottom Fifth: -1500/10000 = -15%
    Second Fifth: -6500/28500 = -22.8%
    Middle Fifth: -9500/49000 = -19.4%
    Fourth Fifth: -7600/79000 = -9.6%
    (I could not find the top fifth divided up as 80-99 and 99-100, but it’s positive and likely a small single digit percentage gain, not a life changer)

    But oh dear, 20% loss of income is enormous,