The Disturbing Rise of Income Inequality in 3 Charts

Recent decades have been very good for the richest Americans; everyone else, not so much.

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President Obama brought the disturbing trends in U.S. income inequality of recent decades to the forefront this week in a speech outlining his vision for the economy. Here are some charts from CBPP's guide to historical trends in income inequality that illustrate some of what he was highlighting.

The Census Bureau has published data on the cash income of U.S. families since the late 1940s. The figure below shows real (inflation-adjusted) income at several points in the distribution scale relative to its 1973 level. The 95th percentile separates the top 5 percent from the remaining 95 percent; the median separates the top half from the bottom half; and the 20th percentile separates the poorest 20 percent from the remaining 80 percent.

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For a generation after World War II, incomes across the distribution scale grew at nearly the same pace — roughly doubling between the late 1940s and the early 1970s. Thereafter, income disparities began to widen, with income growing much faster at the top than in the middle or bottom. 

While Census family income data help illustrate widening income inequality that began in the 1970s, Congressional Budget Office data are better for assessing more recent trends. CBO data let us see what's happened to more comprehensive income measures that include non-cash benefits like employer- and government-provided health insurance, as well as to before- and after-tax income. CBO also offers a more detailed view of what's happened at the top of the income scale. Unfortunately, CBO data are available only from 1979 to 2010.

As the next figure shows, from 1979 to 2007 (just before the financial crisis and Great Recession), average after-tax income rose at all levels but most dramatically at the top, where the income of the top 1 percent quadrupled. The increases in the middle 60 percent and bottom 20 percent were much smaller. Just as it did in rebounding from the collapse in the early 2000s, income at the top has started to rebound from its sharp decline in the financial crisis.

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Data from tax return information for the years 1913-2012 by economists Thomas Piketty and Emmanuel Saez provide the longest historical perspective on income concentration at the top (only a small percentage of people paid income taxes in the early years of the income tax).

As the last figure shows, the share of before-tax income that the richest 1 percent of households receive — which had been declining steadily from the 1930s into the 1970s — has been rising since the late 1970s and, in the past decade, has climbed to levels not seen since the Roaring Twenties. The vast majority of the increase reflects the rising share of before-tax income of the top 0.5 percent. The Piketty-Saez data show that the revival in income concentration at the top that begins to appear in the CBO data in 2010 was in full swing by 2012.

[See a collection of political cartoons on sequestration and the fiscal cliff.]

The sharp rise in inequality might be less disturbing if it was accompanied by substantial income mobility, so that people who began life in low- and moderate-income households could generally expect to move up and most people at the bottom were there because they were experiencing a temporary spell of bad economic luck. But as the President noted in his speech, the evidence on economic mobility is just as troubling as the evidence on rising inequality, especially bottom up mobility.

There's plenty of room to debate the best policies to address the challenges that rising inequality and reduced mobility pose for the American dream. But, the data make clear that it's a debate we should be having.

Chad Stone is chief economist at the Center on Budget and Policy Priorities.

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