Income inequality in the United States
has fluctuated considerably in the United States since measurements began around 1915, moving in an arc between peaks in the 1920s and 2000s, with a lower level of inequality from approximately 1950-1980, followed by increasing inequality, in what has been coined as the great divergence.
The U.S. has the highest level of income inequality among its peers. When measured for all households, U.S. income inequality is comparable to other developed countries before taxes and transfers, but is among the highest after taxes and transfers, meaning the U.S. shifts relatively less income from higher income households to lower income households. In 2016, average market income was $15,600 for the lowest quintile and $280,300 for the highest quintile. The degree of inequality accelerated within the top quintile, with the top 1% at $1.8 million, approximately 30 times the $59,300 income of the middle quintile.
The economic and political impacts of inequality may include slower GDP growth, reduced income mobility, higher poverty rates, greater usage of household debt leading to increased risk of financial crises, and political polarization. Causes of inequality may include executive compensation increasing relative to the average worker, financialization, greater industry concentration, lower unionization rates, lower effective tax rates on higher incomes, and technology changes that reward higher educational attainment.
Measurement is debated, as inequality measures vary significantly, for example, across datasets or whether the measurement is taken based on cash compensation or after taxes and transfer payments. The Gini coefficient is a widely accepted statistic that applies comparisons across jurisdictions, with a zero indicating perfect equality and 1 indicating maximum inequality. Further, various public and private data sets measure those incomes, e.g., from the Congressional Budget Office, the Internal Revenue Service, and Census. According to the Census Bureau, income inequality reached then record levels in 2018, with a Gini of 0.485, Since then the Census Bureau have given values of 0.488 in 2020 and 0.494 in 2021, per pre-tax money income.
U.S. tax and transfer policies are progressive and therefore reduce effective income inequality, as rates of tax generally increase as taxable income increases. As a group, the lowest earning workers, especially those with dependents, pay no income taxes and may actually receive a small subsidy from the federal government. The 2016 U.S. Gini coefficient was.59 based on market income, but was reduced to.42 after taxes and transfers, according to Congressional Budget Office figures. The top 1% share of market income rose from 9.6% in 1979 to a peak of 20.7% in 2007, before falling to 17.5% by 2016. After taxes and transfers, these figures were 7.4%, 16.6%, and 12.5%, respectively.
Definitions
Income distribution can be assessed using a variety of income definitions. Adjustments are applied for various reasons, particularly to better reflect the actual economic resources available to a given individual/household.- Market income—Labor income; business income; capital income ; income received in retirement for past services; and other non-governmental sources of income
- Income before taxes and transfers —market income plus social insurance benefits
- Adjusted compensation or income after taxes and transfers—IBTT plus employee benefits and transfers such as housing subsidies, minus taxes
- Gini coefficient—Summarizes income distribution. It uses a scale from 0 to 1. Zero represents perfect equality, while 1 represents perfect inequality.
"The Gini coefficient can also be interpreted as a measure of one-half of the average difference in income between every pair of households in the population, divided by the average income of the total population. For example, the Gini coefficient of 0.513 for 2016 indicates that the average difference in income between pairs of households in that year was equal to 102.6 percent of average household income in 2016, or about $70,700. Similarly, the Gini coefficient of 0.521 projected for 2021 indicates that the average difference in income between pairs of households would equal 104.2 percent of average household income in 2021, or about $77,800."
History
Income inequality has fluctuated considerably since measurements began around 1915, declining between peaks in the 1920s and 2007 or 2012. Inequality steadily increased from around 1979 to 2007, with a small reduction through 2016, followed by an increase from 2016 to 2018.Before 20th century
In the late 18th century, "incomes were more equally distributed in colonial America than in any other place that can be measured," according to Peter Lindert and Jeffrey Williamson. The richest 1 percent of households held only 8.5% of total income in the late 18th century. Some reasons for this include the ease that the average American had in buying frontier land, which was abundant at the time, and an overall scarcity of labor in non-slaveholding areas, which forced landowners to pay higher wages. There were also relatively few poor people in America at the time, since only those with at least some money could afford to come to America.In 1860, the top 1 percent collected almost one-third of property incomes, as compared to 13.7% in 1774. There was a great deal of competition for land in the cities and non-frontier areas during this time period, with those who had already acquired land becoming richer than everyone else. The newly burgeoning financial sector also greatly rewarded the already-wealthy, as they were the only ones financially sound enough to invest.
1913–1941
An early governmental measure that slightly reduced inequality was the enactment of the first income tax in 1913. The 1918 household Gini coefficient was 40.8. A brief but sharp depression in 1920-1921 reduced incomes. Income inequality rose from 1913 to peaks in 1926 and 1941, after which war-time measures of the Roosevelt administration began to equalize the income distribution. Social Security was enacted in 1935. At several points in this pre-World War II era, in which the Rockefellers and Carnegies dominated American industry, the richest 1% of Americans earned over 20% of the income share.The Great Compression, 1937–1967
From about 1937 to 1947, a period dubbed as the "Great Compression", income inequality fell dramatically. The GINI fell into the high 30s. Progressive New Deal taxation, stronger unions, strong post-war economic growth and regulation by the National War Labor Board broadly raised market incomes and lowered the after-tax incomes of top earners. In the 1950s, marginal tax rates reached 91%, although the top 1% paid only about 16% in income taxes. Tax cuts in 1964 lowered marginal rates and closed loopholes. Medicare and Medicaid were enacted in 1965. The Earned Income Tax Credit was enacted in 1975.The income change was the product of relatively high wages for trade union workers, lack of foreign manufacturing competition and political support for redistributive government policies. By 1947 more than a third of non-farm workers were union members. Unions both raised average wages for their membership, and indirectly, and to a lesser extent, raised wages for non-union workers in similar occupations. Economist Paul Krugman claimed that political support for equalizing government policies was provided by high voter turnout from union voting drives, Southern support for the New Deal, and prestige that the massive mobilization and victory of World War II had given the government.
A 2022 study in the Economic Journal challenged that World War II was a great leveler in income inequality. The study points instead to a gradual decline in income inequality during the Great Depression which extended into the war years.
1979–2007 increase
The return to high inequality began in the 1980s. The Gini first rose above 40 in 1983. Inequality rose almost continuously, with inconsequential dips during the economic recessions in 1990–91, 2001 and 2007. The lowest top 1% pre-tax income share measured between 1913 and 2016 was 10.9%, achieved in 1975, 1976 and 1980. By 1989, this figure was 14.4%, by 1999 it was 17.5% and by 2007 it was 19.6%.Major economic events that affected incomes included the return to lower inflation and higher growth, tax cuts and increases in the early 1980s, cuts following the 1986 tax reforms, tax increases in 1990 and 1993, expansion of the Children's Health Insurance Program in 1997, welfare reform, a 2000 recession, followed by tax cuts in 2001 and 2003 and increases in 2010.
The Nobel laureate, Princeton economist and The New York Times columnist Paul Krugman called this the Great Divergence, a reference to the "Great Compression", an earlier era in the 1930s and the 1940s when incomes became more equal in the US and elsewhere. He contrasts it with the "Great Prosperity" or Golden Age of Capitalism, where from the late 1940s to mid 1970s, at least for workers in the advanced economies, economic growth had delivered benefits broadly shared across the earnings spectrums, with inequality falling as the poorest sections of society increased their incomes at a faster rate than the richest.
CBO reported that for the 1979–2007 period, after-tax income of households in the top 1 percent of earners grew by 275%, compared to 65% for the next 19%, just under 40% for the next 60% and 18% for the bottom fifth. The share of after-tax income received by the top 1% more than doubled from about 8% in 1979 to over 17% in 2007. The share received by the other 19 percent of households in the highest quintile edged up from 35% to 36%. The major cause was an increase in investment income. Capital gains accounted for 80% of the increase in market income for the households in the top 20%. Over the 1991–2000 period capital gains accounted for 45% of market income for the top 20%.
CBO reported that less progressive tax and transfer policies contributed to an increase in after tax/transfer inequality between 1979 and 2007.
Higher incomes due to a college education were a key reason middle income households gained income share relative to those in the lower part of the distribution between 1973 and 2005. This was due in part to technology changes. However, education had less impact thereafter. Further, education did not explain why the top 1% gained disproportionately starting around 1980. Causes included executive pay trends and the financialization of the economy. For example, CEO pay expanded from around 30 times the typical worker pay in 1980 to nearly 350 times by 2007. From 1978 to 2018, CEO compensation grew 940% adjusted for inflation, versus 12% for the typical worker. A 2012 study reported that the main occupational shift for the top 1% was towards finance, while in 2009 "the richest 25 hedge-fund investors earned more than $25 billion, roughly six times as much as all the chief executives of companies in the S&P 500 stock index combined."
Scholars and others differ as the causes and significance of the divergence, which helped ignite the Occupy movement in 2011. While education and increased demand for skilled labour is often cited as a cause of increased inequality, especially among conservatives, many social scientists point to conservative politics, neoliberal economic and social policies and public policy as an important cause of inequality; others believe its causes are not well understood.
The share of income held by the top 1 percent was as large in 2005 as in 1928. That year household Gini reached 45.