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2011-12-18 11:04:20
by G. William Domhoff
This document presents details on the wealth and income distributions in the
United States, and explains how we use these two distributions as power
indicators.
Some of the information may come as a surprise to many people. In fact, I know
it will be a surprise and then some, because of a recent study (Norton &
Ariely, 2010) showing that most Americans (high income or low income, female or
male, young or old, Republican or Democrat) have no idea just how concentrated
the wealth distribution actually is. More on that a bit later.
As far as the income distribution, the most striking numbers on income
inequality will come last, showing the dramatic change in the ratio of the
average CEO's paycheck to that of the average factory worker over the past 40
years.
First, though, some definitions. Generally speaking, wealth is the value of
everything a person or family owns, minus any debts. However, for purposes of
studying the wealth distribution, economists define wealth in terms of
marketable assets, such as real estate, stocks, and bonds, leaving aside
consumer durables like cars and household items because they are not as readily
converted into cash and are more valuable to their owners for use purposes than
they are for resale (see Wolff, 2004, p. 4, for a full discussion of these
issues). Once the value of all marketable assets is determined, then all debts,
such as home mortgages and credit card debts, are subtracted, which yields a
person's net worth. In addition, economists use the concept of financial wealth
-- also referred to in this document as "non-home wealth" -- which is defined
as net worth minus net equity in owner-occupied housing. As Wolff (2004, p. 5)
explains, "Financial wealth is a more 'liquid' concept than marketable wealth,
since one's home is difficult to convert into cash in the short term. It thus
reflects the resources that may be immediately available for consumption or
various forms of investments."
We also need to distinguish wealth from income. Income is what people earn from
work, but also from dividends, interest, and any rents or royalties that are
paid to them on properties they own. In theory, those who own a great deal of
wealth may or may not have high incomes, depending on the returns they receive
from their wealth, but in reality those at the very top of the wealth
distribution usually have the most income. (But it's important to note that for
the rich, most of that income does not come from "working": in 2008, only 19%
of the income reported by the 13,480 individuals or families making over $10
million came from wages and salaries. See Norris, 2010, for more details.)
This document focuses on the "Top 1%" as a whole because that's been the
traditional cut-off point for "the top" in academic studies, and because it's
easy for us to keep in mind that we are talking about one in a hundred. But it
is also important to realize that the lower half of that top 1% has far less
than those in the top half; in fact, both wealth and income are
super-concentrated in the top 0.1%, which is just one in a thousand. (To get an
idea of the differences, take a look at an insider account by a long-time
investment manager who works for the well-to-do and very rich. It nicely
explains what the different levels have -- and how they got it. Also, David Cay
Johnston (2011) has written a column about the differences among the top 1%,
based on 2009 IRS information.)
As you read through the facts and figures that follow, please keep in mind that
they are usually two or three years out of date because it takes time for one
set of experts to collect the basic information and make sure it is accurate,
and then still more time for another set of experts to analyze it and write
their reports. It's also the case that the infamous housing bubble of the first
eight years of the 21st century inflated some of the wealth numbers. The
important point to keep in mind is that it's the relative positions of wealth
holders and income earners that we are trying to comprehend in this document.
(To get some idea about absolute dollar amounts, read the investment manager's
insider account that was mentioned in the previous paragraph.)
So far there are only tentative projections -- based on the price of housing
and stock in July 2009 -- on the effects of the Great Recession on the wealth
distribution. They suggest that average Americans have been hit much harder
than wealthy Americans. Edward Wolff, the economist we draw upon the most in
this document, concludes that there has been an "astounding" 36.1% drop in the
wealth (marketable assets) of the median household since the peak of the
housing bubble in 2007. By contrast, the wealth of the top 1% of households
dropped by far less: just 11.1%. So as of April 2010, it looks like the wealth
distribution is even more unequal than it was in 2007. (See Wolff, 2010 for
more details.)
There's also some general information available on median income and percentage
of people below the poverty line in 2010. As might be expected, most of the new
information shows declines; in fact, a report from the Center for Economic and
Policy Research (2011) concludes that the decade from 2000 to 2010 was a "lost
decade" for most Americans.
One final general point before turning to the specifics. People who have looked
at this document in the past often asked whether progressive taxation reduces
some of the income inequality that exists before taxes are paid. The answer:
not by much, if we count all of the taxes that people pay, from sales taxes to
property taxes to payroll taxes (in other words, not just income taxes). And
the top 1% of income earners actually pay a smaller percentage of their incomes
to taxes than the 9% just below them. These findings are discussed in detail
near the end of this document.
The Wealth Distribution
In the United States, wealth is highly concentrated in a relatively few hands.
As of 2007, the top 1% of households (the upper class) owned 34.6% of all
privately held wealth, and the next 19% (the managerial, professional, and
small business stratum) had 50.5%, which means that just 20% of the people
owned a remarkable 85%, leaving only 15% of the wealth for the bottom 80% (wage
and salary workers). In terms of financial wealth (total net worth minus the
value of one's home), the top 1% of households had an even greater share:
42.7%. Table 1 and Figure 1 present further details drawn from the careful work
of economist Edward N. Wolff at New York University (2010).
Table 1: Distribution of net worth and financial wealth in the United States,
1983-2007
Total Net Worth
Top 1 percent Next 19 percent Bottom 80 percent
1983 33.8% 47.5% 18.7%
1989 37.4% 46.2% 16.5%
1992 37.2% 46.6% 16.2%
1995 38.5% 45.4% 16.1%
1998 38.1% 45.3% 16.6%
2001 33.4% 51.0% 15.6%
2004 34.3% 50.3% 15.3%
2007 34.6% 50.5% 15.0%
Financial Wealth
Top 1 percent Next 19 percent Bottom 80 percent
1983 42.9% 48.4% 8.7%
1989 46.9% 46.5% 6.6%
1992 45.6% 46.7% 7.7%
1995 47.2% 45.9% 7.0%
1998 47.3% 43.6% 9.1%
2001 39.7% 51.5% 8.7%
2004 42.2% 50.3% 7.5%
2007 42.7% 50.3% 7.0%
Total assets are defined as the sum of: (1) the gross value of owner-occupied
housing; (2) other real estate owned by the household; (3) cash and demand
deposits; (4) time and savings deposits, certificates of deposit, and money
market accounts; (5) government bonds, corporate bonds, foreign bonds, and
other financial securities; (6) the cash surrender value of life insurance
plans; (7) the cash surrender value of pension plans, including IRAs, Keogh,
and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in
unincorporated businesses; and (10) equity in trust funds.
Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt,
including auto loans; and (3) other debt. From Wolff (2004, 2007, & 2010).
Figure 1: Net worth and financial wealth distribution in the U.S. in 2007
In terms of types of financial wealth, the top one percent of households have
38.3% of all privately held stock, 60.6% of financial securities, and 62.4% of
business equity. The top 10% have 80% to 90% of stocks, bonds, trust funds, and
business equity, and over 75% of non-home real estate. Since financial wealth
is what counts as far as the control of income-producing assets, we can say
that just 10% of the people own the United States of America.
Table 2: Wealth distribution by type of asset, 2007
Investment Assets
Top 1 percent Next 9 percent Bottom 90 percent
Business equity 62.4% 30.9% 6.7%
Financial securities 60.6% 37.9% 1.5%
Trusts 38.9% 40.5% 20.6%
Stocks and mutual funds 38.3% 42.9% 18.8%
Non-home real estate 28.3% 48.6% 23.1%
TOTAL investment assets 49.7% 38.1% 12.2%
Housing, Liquid Assets, Pension Assets, and Debt
Top 1 percent Next 9 percent Bottom 90 percent
Deposits 20.2% 37.5% 42.3%
Pension accounts 14.4% 44.8% 40.8%
Life insurance 22.0% 32.9% 45.1%
Principal residence 9.4% 29.2% 61.5%
TOTAL other assets 12.0% 33.8% 54.2%
Debt 5.4% 21.3% 73.4%
From Wolff (2010).
Figure 2a: Wealth distribution by type of asset, 2007: investment assets
Figure 2b: Wealth distribution by type of asset, 2007: other assets
Inheritance and estate taxes
Figures on inheritance tell much the same story. According to a study published
by the Federal Reserve Bank of Cleveland, only 1.6% of Americans receive
$100,000 or more in inheritance. Another 1.1% receive $50,000 to $100,000. On
the other hand, 91.9% receive nothing (Kotlikoff & Gokhale, 2000). Thus, the
attempt by ultra-conservatives to eliminate inheritance taxes -- which they
always call "death taxes" for P.R. reasons -- would take a huge bite out of
government revenues (an estimated $253 billion between 2012 and 2022) for the
benefit of the heirs of the mere 0.6% of Americans whose death would lead to
the payment of any estate taxes whatsoever (Citizens for Tax Justice, 2010b).
It is noteworthy that some of the richest people in the country oppose this
ultra-conservative initiative, suggesting that this effort is driven by
anti-government ideology. In other words, few of the ultra-conservative and
libertarian activists behind the effort will benefit from it in any material
way. However, a study (Kenny et al., 2006) of the financial support for
eliminating inheritance taxes discovered that 18 super-rich families (mostly
Republican financial donors, but a few who support Democrats) provide the
anti-government activists with most of the money for this effort. (For more
infomation, including the names of the major donors, download the article from
United For a Fair Economy's Web site.)
Actually, ultra-conservatives and their wealthy financial backers may not have
to bother to eliminate what remains of inheritance taxes at the federal level.
The rich already have a new way to avoid inheritance taxes forever -- for
generations and generations -- thanks to bankers. After Congress passed a
reform in 1986 making it impossible for a "trust" to skip a generation before
paying inheritance taxes, bankers convinced legislatures in many states to
eliminate their "rules against perpetuities," which means that trust funds set
up in those states can exist in perpetuity, thereby allowing the trust funds to
own new businesses, houses, and much else for descendants of rich people, and
even to allow the beneficiaries to avoid payments to creditors when in personal
debt or sued for causing accidents and injuries. About $100 billion in trust
funds has flowed into those states so far. You can read the details on these
"dynasty trusts" (which could be the basis for an even more solidified
"American aristocracy") in a New York Times opinion piece published in July
2010 by Boston College law professor Ray Madoff, who also has a book on this
and other new tricks: Immortality and the Law: The Rising Power of the American
Dead (Yale University Press, 2010).
Home ownership & wealth
For the vast majority of Americans, their homes are by far the most significant
wealth they possess. Figure 3 comes from the Federal Reserve Board's Survey of
Consumer Finances (via Wolff, 2010) and compares the median income, total
wealth (net worth, which is marketable assets minus debt), and non-home wealth
(which earlier we called financial wealth) of White, Black, and Hispanic
households in the U.S.
Figure 3: Income and wealth by race in the U.S.
Besides illustrating the significance of home ownership as a source of wealth,
the graph also shows that Black and Latino households are faring significantly
worse overall, whether we are talking about income or net worth. In 2007, the
average white household had 15 times as much total wealth as the average
African-American or Latino household. If we exclude home equity from the
calculations and consider only financial wealth, the ratios are in the
neighborhood of 100:1. Extrapolating from these figures, we see that 70% of
white families' wealth is in the form of their principal residence; for Blacks
and Hispanics, the figures are 95% and 96%, respectively.
And for all Americans, things are getting worse: as the projections to July
2009 by Wolff (2010) make clear, the last few years have seen a huge loss in
housing wealth for most families, making the gap between the rich and the rest
of America even greater, and increasing the number of households with no
marketable assets from 18.6% to 24.1%.
Do Americans know their country's wealth distribution?
A remarkable study (Norton & Ariely, 2010) reveals that Americans have no idea
that the wealth distribution (defined for them in terms of "net worth") is as
concentrated as it is. When shown three pie charts representing possible wealth
distributions, 90% or more of the 5,522 respondents -- whatever their gender,
age, income level, or party affiliation -- thought that the American wealth
distribution most resembled one in which the top 20% has about 60% of the
wealth. In fact, of course, the top 20% control about 85% of the wealth (refer
back to Table 1 and Figure 1 in this document for a more detailed breakdown of
the numbers).
Even more striking, they did not come close on the amount of wealth held by the
bottom 40% of the population. It's a number I haven't even mentioned so far,
and it's shocking: the lowest two quintiles hold just 0.3% of the wealth in the
United States. Most people in the survey guessed the figure to be between 8%
and 10%, and two dozen academic economists got it wrong too, by guessing about
2% -- seven times too high. Those surveyed did have it about right for what the
20% in the middle have; it's at the top and the bottom that they don't have any
idea of what's going on.
Americans from all walks of life were also united in their vision of what the
"ideal" wealth distribution would be, which may come as an even bigger surprise
than their shared misinformation on the actual wealth distribution. They said
that the ideal wealth distribution would be one in which the top 20% owned
between 30 and 40 percent of the privately held wealth, which is a far cry from
the 85 percent that the top 20% actually own. They also said that the bottom
40% -- that's 120 million Americans -- should have between 25% and 30%, not the
mere 8% to 10% they thought this group had, and far above the 0.3% they
actually had. In fact, there's no country in the world that has a wealth
distribution close to what Americans think is ideal when it comes to fairness.
So maybe Americans are much more egalitarian than most of them realize about
each other, at least in principle and before the rat race begins.
Figure 4, reproduced with permission from Norton & Ariely's article in
Perspectives on Psychological Science, shows the actual wealth distribution,
along with the survey respondents' estimated and ideal distributions, in
graphic form.
Figure 4: The actual United States wealth distribution plotted against the
estimated and ideal distributions.
Note: In the "Actual" line, the bottom two quintiles are not visible because
the lowest quintile owns just 0.1% of all wealth, and the second-lowest
quintile owns 0.2%.
Source: Norton & Ariely, 2010.
David Cay Johnston, a retired tax reporter for the New York Times, published an
excellent summary of Norton & Ariely's findings (Johnston, 2010b; you can
download the article from Johnston's Web site).
Historical context
Numerous studies show that the wealth distribution has been extremely
concentrated throughout American history, with the top 1% already owning 40-50%
in large port cities like Boston, New York, and Charleston in the 19th century.
It was very stable over the course of the 20th century, although there were
small declines in the aftermath of the New Deal and World II, when most people
were working and could save a little money. There were progressive income tax
rates, too, which took some money from the rich to help with government
services.
Then there was a further decline, or flattening, in the 1970s, but this time in
good part due to a fall in stock prices, meaning that the rich lost some of the
value in their stocks. By the late 1980s, however, the wealth distribution was
almost as concentrated as it had been in 1929, when the top 1% had 44.2% of all
wealth. It has continued to edge up since that time, with a slight decline from
1998 to 2001, before the economy crashed in the late 2000s and little people
got pushed down again. Table 3 and Figure 5 present the details from 1922
through 2007.
Table 3: Share of wealth held by the Bottom 99% and Top 1% in the United
States, 1922-2007.
Bottom 99 percent Top 1 percent
1922 63.3% 36.7%
1929 55.8% 44.2%
1933 66.7% 33.3%
1939 63.6% 36.4%
1945 70.2% 29.8%
1949 72.9% 27.1%
1953 68.8% 31.2%
1962 68.2% 31.8%
1965 65.6% 34.4%
1969 68.9% 31.1%
1972 70.9% 29.1%
1976 80.1% 19.9%
1979 79.5% 20.5%
1981 75.2% 24.8%
1983 69.1% 30.9%
1986 68.1% 31.9%
1989 64.3% 35.7%
1992 62.8% 37.2%
1995 61.5% 38.5%
1998 61.9% 38.1%
2001 66.6% 33.4%
2004 65.7% 34.3%
2007 65.4% 34.6%
Sources: 1922-1989 data from Wolff (1996). 1992-2007 data from Wolff (2010).
Figure 5: Share of wealth held by the Bottom 99% and Top 1% in the United
States, 1922-2007.
Here are some dramatic facts that sum up how the wealth distribution became
even more concentrated between 1983 and 2004, in good part due to the tax cuts
for the wealthy and the defeat of labor unions: Of all the new financial wealth
created by the American economy in that 21-year-period, fully 42% of it went to
the top 1%. A whopping 94% went to the top 20%, which of course means that the
bottom 80% received only 6% of all the new financial wealth generated in the
United States during the '80s, '90s, and early 2000s (Wolff, 2007).
The rest of the world
Thanks to a 2006 study by the World Institute for Development Economics
Research -- using statistics for the year 2000 -- we now have information on
the wealth distribution for the world as a whole, which can be compared to the
United States and other well-off countries. The authors of the report admit
that the quality of the information available on many countries is very spotty
and probably off by several percentage points, but they compensate for this
problem with very sophisticated statistical methods and the use of different
sets of data. With those caveats in mind, we can still safely say that the top
10% of the world's adults control about 85% of global household wealth --
defined very broadly as all assets (not just financial assets), minus debts.
That compares with a figure of 69.8% for the top 10% for the United States. The
only industrialized democracy with a higher concentration of wealth in the top
10% than the United States is Switzerland at 71.3%. For the figures for several
other Northern European countries and Canada, all of which are based on
high-quality data, see Table 4.
Table 4: Percentage of wealth held in 2000 by the Top 10% of the adult
population in various Western countries
wealth owned
by top 10%
Switzerland 71.3%
United States 69.8%
Denmark 65.0%
France 61.0%
Sweden 58.6%
UK 56.0%
Canada 53.0%
Norway 50.5%
Germany 44.4%
Finland 42.3%
The Relationship Between Wealth and Power
What's the relationship between wealth and power? To avoid confusion, let's be
sure we understand they are two different issues. Wealth, as I've said, refers
to the value of everything people own, minus what they owe, but the focus is on
"marketable assets" for purposes of economic and power studies. Power, as
explained elsewhere on this site, has to do with the ability (or call it
capacity) to realize wishes, or reach goals, which amounts to the same thing,
even in the face of opposition (Russell, 1938; Wrong, 1995). Some definitions
refine this point to say that power involves Person A or Group A affecting
Person B or Group B "in a manner contrary to B's interests," which then
necessitates a discussion of "interests," and quickly leads into the realm of
philosophy (Lukes, 2005, p. 30). Leaving those discussions for the
philosophers, at least for now, how do the concepts of wealth and power relate?
First, wealth can be seen as a "resource" that is very useful in exercising
power. That's obvious when we think of donations to political parties, payments
to lobbyists, and grants to experts who are employed to think up new policies
beneficial to the wealthy. Wealth also can be useful in shaping the general
social environment to the benefit of the wealthy, whether through hiring public
relations firms or donating money for universities, museums, music halls, and
art galleries.
Second, certain kinds of wealth, such as stock ownership, can be used to
control corporations, which of course have a major impact on how the society
functions. Tables 5a and 5b show what the distribution of stock ownership looks
like. Note how the top one percent's share of stock equity increased (and the
bottom 80 percent's share decreased) between 2001 and 2007.
Table 5a: Concentration of stock ownership in the United States, 2001-2007
Percent of all stock owned:
Wealth class 2001 2004 2007
Top 1% 33.5% 36.7% 38.3%
Next 19% 55.8% 53.9% 52.8%
Bottom 80% 10.7% 9.4% 8.9%
Table 5b: Amount of stock owned by various wealth classes in the U.S., 2007
Percent of households owning stocks worth:
Wealth class $0 (no stocks) $1-$10,000 More than $10,000
Top 1% 7.4% 4.2% 88.4%
95-99% 7.8% 2.7% 89.5%
90-95% 13.2% 5.4% 81.4%
80-90% 17.9% 10.9% 71.2%
60-80% 34.6% 18.3% 47.1%
40-60% 52.3% 25.6% 22.1%
20-40% 69.7% 21.6% 8.7%
Bottom 20% 84.7% 14.3% 2.0%
TOTAL 50.9% 17.5% 31.6%
Both tables' data from Wolff (2007 & 2010). Includes direct ownership of stock
shares and indirect ownership through mutual funds, trusts, and IRAs, Keogh
plans, 401(k) plans, and other retirement accounts. All figures are in 2007
dollars.
Third, just as wealth can lead to power, so too can power lead to wealth. Those
who control a government can use their position to feather their own nests,
whether that means a favorable land deal for relatives at the local level or a
huge federal government contract for a new corporation run by friends who will
hire you when you leave government. If we take a larger historical sweep and
look cross-nationally, we are well aware that the leaders of conquering armies
often grab enormous wealth, and that some religious leaders use their positions
to acquire wealth.
There's a fourth way that wealth and power relate. For research purposes, the
wealth distribution can be seen as the main "value distribution" within the
general power indicator I call "who benefits." What follows in the next three
paragraphs is a little long-winded, I realize, but it needs to be said because
some social scientists -- primarily pluralists -- argue that who wins and who
loses in a variety of policy conflicts is the only valid power indicator (Dahl,
1957, 1958; Polsby, 1980). And philosophical discussions don't even mention
wealth or other power indicators (Lukes, 2005). (If you have heard it all
before, or can do without it, feel free to skip ahead to the last paragraph of
this section)
Here's the argument: if we assume that most people would like to have as great
a share as possible of the things that are valued in the society, then we can
infer that those who have the most goodies are the most powerful. Although some
value distributions may be unintended outcomes that do not really reflect
power, as pluralists are quick to tell us, the general distribution of valued
experiences and objects within a society still can be viewed as the most
publicly visible and stable outcome of the operation of power.
In American society, for example, wealth and well-being are highly valued.
People seek to own property, to have high incomes, to have interesting and safe
jobs, to enjoy the finest in travel and leisure, and to live long and healthy
lives. All of these "values" are unequally distributed, and all may be utilized
as power indicators. However, the primary focus with this type of power
indicator is on the wealth distribution sketched out in the previous section.
The argument for using the wealth distribution as a power indicator is
strengthened by studies showing that such distributions vary historically and
from country to country, depending upon the relative strength of rival
political parties and trade unions, with the United States having the most
highly concentrated wealth distribution of any Western democracy except
Switzerland. For example, in a study based on 18 Western democracies, strong
trade unions and successful social democratic parties correlated with greater
equality in the income distribution and a higher level of welfare spending
(Stephens, 1979).
And now we have arrived at the point I want to make. If the top 1% of
households have 30-35% of the wealth, that's 30 to 35 times what they would
have if wealth were equally distributed, and so we infer that they must be
powerful. And then we set out to see if the same set of households scores high
on other power indicators (it does). Next we study how that power operates,
which is what most articles on this site are about. Furthermore, if the top 20%
have 84% of the wealth (and recall that 10% have 85% to 90% of the stocks,
bonds, trust funds, and business equity), that means that the United States is
a power pyramid. It's tough for the bottom 80% -- maybe even the bottom 90% --
to get organized and exercise much power.
Income and Power
The income distribution also can be used as a power indicator. As Table 6
shows, it is not as concentrated as the wealth distribution, but the top 1% of
income earners did receive 17% of all income in the year 2003 and 21.3% in
2006. That's up from 12.8% for the top 1% in 1982, which is quite a jump, and
it parallels what is happening with the wealth distribution. This is further
support for the inference that the power of the corporate community and the
upper class have been increasing in recent decades.
Table 6: Distribution of income in the United States, 1982-2006
Income
Top 1 percent Next 19 percent Bottom 80 percent
1982 12.8% 39.1% 48.1%
1988 16.6% 38.9% 44.5%
1991 15.7% 40.7% 43.7%
1994 14.4% 40.8% 44.9%
1997 16.6% 39.6% 43.8%
2000 20.0% 38.7% 41.4%
2003 17.0% 40.8% 42.2%
2006 21.3% 40.1% 38.6%
From Wolff (2010).
The rising concentration of income can be seen in a special New York Times
analysis by David Cay Johnston of an Internal Revenue Service report on income
in 2004. Although overall income had grown by 27% since 1979, 33% of the gains
went to the top 1%. Meanwhile, the bottom 60% were making less: about 95 cents
for each dollar they made in 1979. The next 20% - those between the 60th and
80th rungs of the income ladder -- made $1.02 for each dollar they earned in
1979. Furthermore, Johnston concludes that only the top 5% made significant
gains ($1.53 for each 1979 dollar). Most amazing of all, the top 0.1% -- that's
one-tenth of one percent -- had more combined pre-tax income than the poorest
120 million people (Johnston, 2006).
But the increase in what is going to the few at the top did not level off, even
with all that. As of 2007, income inequality in the United States was at an
all-time high for the past 95 years, with the top 0.01% -- that's one-hundredth
of one percent -- receiving 6% of all U.S. wages, which is double what it was
for that tiny slice in 2000; the top 10% received 49.7%, the highest since 1917
(Saez, 2009). However, in an analysis of 2008 tax returns for the top 0.2% --
that is, those whose income tax returns reported $1,000,000 or more in income
(mostly from individuals, but nearly a third from couples) -- it was found that
they received 13% of all income, down slightly from 16.1% in 2007 due to the
decline in payoffs from financial assets (Norris, 2010).
And the rate of increase is even higher for the very richest of the rich: the
top 400 income earners in the United States. According to another analysis by
Johnston (2010a), the average income of the top 400 tripled during the Clinton
Administration and doubled during the first seven years of the Bush
Administration. So by 2007, the top 400 averaged $344.8 million per person, up
31% from an average of $263.3 million just one year earlier. (For another
recent revealing study by Johnston, read "Is Our Tax System Helping Us Create
Wealth?").
How are these huge gains possible for the top 400? It's due to cuts in the tax
rates on capital gains and dividends, which were down to a mere 15% in 2007
thanks to the tax cuts proposed by the Bush Administration and passed by
Congress in 2003. Since almost 75% of the income for the top 400 comes from
capital gains and dividends, it's not hard to see why tax cuts on income
sources available to only a tiny percent of Americans mattered greatly for the
high-earning few. Overall, the effective tax rate on high incomes fell by 7%
during the Clinton presidency and 6% in the Bush era, so the top 400 had a tax
rate of 20% or less in 2007, far lower than the marginal tax rate of 35% that
the highest income earners (over $372,650) supposedly pay. It's also worth
noting that only the first $106,800 of a person's income is taxed for Social
Security purposes (as of 2010), so it would clearly be a boon to the Social
Security Fund if everyone -- not just those making less than $106,800 -- paid
the Social Security tax on their full incomes.
Do Taxes Redistribute Income?
It is widely believed that taxes are highly progressive and, furthermore, that
the top several percent of income earners pay most of the taxes received by the
federal government. Both ideas are wrong because they focus on official, rather
than "effective" tax rates and ignore payroll taxes, which are mostly paid by
those with incomes below $100,000 per year.
But what matters in terms of a power analysis is what percentage of their
income people at different income levels pay to all levels of government
(federal, state, and local) in taxes. If the less-well-off majority is somehow
able to wield power, we would expect that the high earners would pay a bigger
percentage of their income in taxes, because the majority figures the
well-to-do would still have plenty left after taxes to make new investments and
lead the good life. If the high earners have the most power, we'd expect them
to pay about the same as everybody else, or less.
Citizens for Tax Justice, a research group that's been studying tax issues from
its offices in Washington since 1979, provides the information we need. When
all taxes (not just income taxes) are taken into account, the lowest 20% of
earners (who average about $12,400 per year), paid 16.0% of their income to
taxes in 2009; and the next 20% (about $25,000/year), paid 20.5% in taxes. So
if we only examine these first two steps, the tax system looks like it is going
to be progressive.
And it keeps looking progressive as we move further up the ladder: the middle
20% (about $33,400/year) give 25.3% of their income to various forms of
taxation, and the next 20% (about $66,000/year) pay 28.5%. So taxes are
progressive for the bottom 80%. But if we break the top 20% down into smaller
chunks, we find that progressivity starts to slow down, then it stops, and then
it slips backwards for the top 1%.
Specifically, the next 10% (about $100,000/year) pay 30.2% of their income as
taxes; the next 5% ($141,000/year) dole out 31.2% of their earnings for taxes;
and the next 4% ($245,000/year) pay 31.6% to taxes. You'll note that the
progressivity is slowing down. As for the top 1% -- those who take in $1.3
million per year on average -- they pay 30.8% of their income to taxes, which
is a little less than what the 9% just below them pay, and only a tiny bit more
than what the segment between the 80th and 90th percentile pays.
What I've just explained with words can be seen more clearly in Figure 6.
Figure 6: Share of income paid as tax, including local and state tax
Source: Citizens for Tax Justice (2010a).
We also can look at this information on income and taxes in another way by
asking what percentage of all taxes various income levels pay. (This is not the
same as the previous question, which asked what percentage of their incomes
went to taxes for people at various income levels.) And the answer to this new
question can be found in Figure 7. For example, the top 20% receives 59.1% of
all income and pays 64.3% of all the taxes, so they aren't carrying a huge
extra burden. At the other end, the bottom 20%, which receives 3.5% of all
income, pays 1.9% of all taxes.
Figure 7: Share of all income earned and all taxes paid, by quintile
Source: Citizens for Tax Justice (2010a).
So the best estimates that can be put together from official government numbers
show a little bit of progressivity. But the details on those who earn millions
of dollars each year are very hard to come by, because they can stash a large
part of their wealth in off-shore tax havens in the Caribbean and little
countries in Europe, starting with Switzerland. And there are many loopholes
and gimmicks they can use, as summarized with striking examples in Free Lunch
and Perfectly Legal, the books by Johnston that were mentioned earlier. For
example, Johnston explains the ways in which high earners can hide their money
and delay on paying taxes, and then invest for a profit what normally would be
paid in taxes.
Income inequality in other countries
The degree of income inequality in the United States can be compared to that in
other countries on the basis of the Gini coefficient, a mathematical ratio that
allows economists to put all countries on a scale with values that range
(hypothetically) from zero (everyone in the country has the same income) to 100
(one person in the country has all the income). On this widely used measure,
the United States ends up 95th out of the 134 countries that have been studied
-- that is, only 39 of the 134 countries have worse income inequality. The U.S.
has a Gini index of 45.0; Sweden is the lowest with 23.0, and South Africa is
near the top with 65.0.
The table that follows displays the scores for 22 major countries, along with
their ranking in the longer list of 134 countries that were studied (most of
the other countries are very small and/or very poor). In examining this table,
remember that it does not measure the same thing as Table 4 earlier in this
document, which was about the wealth distribution. Here we are looking at the
income distribution, so the two tables won't match up as far as rankings.
That's because a country can have a highly concentrated wealth distribution and
still have a more equal distribution of income due to high taxes on top income
earners and/or high minimum wages -- both Switzerland and Sweden follow this
pattern. So one thing that's distinctive about the U.S. compared to other
industrialized democracies is that both its wealth and income distributions are
highly concentrated.
Table 7: Income equality in selected countries
Country/Overall Rank Gini Coefficient
1. Sweden 23.0
2. Norway 25.0
8. Austria 26.0
10. Germany 27.0
17. Denmark 29.0
25. Australia 30.5
34. Italy 32.0
35. Canada 32.1
37. France 32.7
42. Switzerland 33.7
43. United Kingdom 34.0
45. Egypt 34.4
56. India 36.8
61. Japan 38.1
68. Israel 39.2
81. China 41.5
82. Russia 42.3
90. Iran 44.5
93. United States 45.0
107. Mexico 48.2
125. Brazil 56.7
133. South Africa 65.0
Note: These figures reflect family/household income, not individual income.
Source: Central Intelligence Agency (2010).
The impact of "transfer payments"
As we've seen, taxes don't have much impact on the income distribution,
especially when we look at the top 1% or top 0.1%. Nor do various kinds of tax
breaks and loopholes have much impact on the income distribution overall.
That's because the tax deductions that help those with lower incomes -- such as
the Earned Income Tax Credit (EITC), tax forgiveness for low-income earners on
Social Security, and tax deductions for dependent children -- are offset by the
breaks for high-income earners (for example: dividends and capital gains are
only taxed at a rate of 15%; there's no tax on the interest earned from state
and municipal bonds; and 20% of the tax deductions taken for dependent children
actually go to people earning over $100,000 a year).
But it is sometimes said that income inequality is reduced significantly by
government programs that matter very much in the lives of low-income Americans.
These programs provide "transfer payments," which are a form of income for
those in need. They include unemployment compensation, cash payments to the
elderly who don't have enough to live on from Social Security, Temporary
Assistance to Needy Families (welfare), food stamps, and Medicaid.
Thomas Hungerford (2009), a tax expert who works for the federal government's
Congressional Research Service, carried out a study for Congress that tells us
about the real-world impact of transfer payments on reducing income inequality.
Hungerford's study is based on 2004 income data from an ongoing study of a
representative sample of families at the University of Michigan, and it
includes the effects of both taxes and four types of transfer payments (Social
Security, Temporary Assistance to Needy Families, food stamps, and Medicaid).
The table that follows shows the income inequality index (that is, the Gini
coefficient) at three points along the way: (1.) before taxes or transfers; (2)
after taxes are taken into account; and (3) after both taxes and transfer
payments are included in the equation. (The Citizens for Tax Justice study of
income and taxes for 2009, discussed earlier, included transfer payments as
income, so that study and Hungerford's have similar starting points. But they
can't be directly compared, because they use different years.)
Table 8: Redistributive effect of taxes and transfer payments
Income definition Gini index
Before taxes and transfers 0.5116
After taxes, before transfers 0.4774
After taxes and transfers 0.4284
Source: Congressional Research Service, adapted from Hungerford (2009).
As can be seen, Hungerford's findings first support what we had learned earlier
from the Citizens for Tax Justice study: taxes don't do much to reduce
inequality. They secondly reveal that transfer payments have a slightly larger
impact on inequality than taxes, but not much. Third, his findings tell us that
taxes and transfer payments together reduce the inequality index from .52 to
.43, which is very close to the CIA's estimate of .45 for 2008.
In short, for those who ask if progressive taxes and transfer payments even
things out to a significant degree, the answer is that while they have some
effect, they don't do nearly as much as in Canada, major European countries, or
Japan.
Income Ratios and Power: Executives vs. Laborers
Another way that income can be used as a power indicator is by comparing
average CEO annual pay to average factory worker pay, something that has been
done for many years by Business Week and, later, the Associated Press. The
ratio of CEO pay to factory worker pay rose from 42:1 in 1960 to as high as
531:1 in 2000, at the height of the stock market bubble, when CEOs were cashing
in big stock options. It was at 411:1 in 2005 and 344:1 in 2007, according to
research by United for a Fair Economy. By way of comparison, the same ratio is
about 25:1 in Europe. The changes in the American ratio from 1960 to 2007 are
displayed in Figure 8, which is based on data from several hundred of the
largest corporations.
Figure 8: CEOs' pay as a multiple of the average worker's pay, 1960-2007
Source: Executive Excess 2008, the 15th Annual CEO Compensation Survey from the
Institute for Policy Studies and United for a Fair Economy.
It's even more revealing to compare the actual rates of increase of the
salaries of CEOs and ordinary workers; from 1990 to 2005, CEOs' pay increased
almost 300% (adjusted for inflation), while production workers gained a scant
4.3%. The purchasing power of the federal minimum wage actually declined by
9.3%, when inflation is taken into account. These startling results are
illustrated in Figure 9.
Figure 9: CEOs' average pay, production workers' average pay, the S&P 500
Index, corporate profits, and the federal minimum wage, 1990-2005 (all figures
adjusted for inflation)
Source: Executive Excess 2006, the 13th Annual CEO Compensation Survey from the
Institute for Policy Studies and United for a Fair Economy.
Although some of the information I've relied upon to create this section on
executives' vs. workers' pay is a few years old now, the AFL/CIO provides
up-to-date information on CEO salaries at their Web site. There, you can learn
that the median compensation for CEO's in all industries as of early 2010 is
$3.9 million; it's $10.6 million for the companies listed in Standard and
Poor's 500, and $19.8 million for the companies listed in the Dow-Jones
Industrial Average. Since the median worker's pay is about $36,000, then you
can quickly calculate that CEOs in general make 100 times as much as the
workers, that CEO's of S&P 500 firms make almost 300 times as much, and that
CEOs at the Dow-Jones companies make 550 times as much. (For a more recent
update on CEOs' pay, see "The Drought Is Over (At Least for CEOs)" at
NYTimes.com; the article reports that the median compensation for CEOs at 200
major companies was $9.6 million in 2010 -- up by about 12% over 2009 and
generally equal to or surpassing pre-recession levels. For specific information
about some of the top CEOs, see http://projects.nytimes.com/
executive_compensation.
If you wonder how such a large gap could develop, the proximate, or most
immediate, factor involves the way in which CEOs now are able to rig things so
that the board of directors, which they help select -- and which includes some
fellow CEOs on whose boards they sit -- gives them the pay they want. The trick
is in hiring outside experts, called "compensation consultants," who give the
process a thin veneer of economic respectability.
The process has been explained in detail by a retired CEO of DuPont, Edgar S.
Woolard, Jr., who is now chair of the New York Stock Exchange's executive
compensation committee. His experience suggests that he knows whereof he
speaks, and he speaks because he's concerned that corporate leaders are losing
respect in the public mind. He says that the business page chatter about CEO
salaries being set by the competition for their services in the executive labor
market is "bull." As to the claim that CEOs deserve ever higher salaries
because they "create wealth," he describes that rationale as a "joke," says the
New York Times (Morgenson, 2005).
Here's how it works, according to Woolard:
The compensation committee [of the board of directors] talks to an outside
consultant who has surveys you could drive a truck through and pay anything you
want to pay, to be perfectly honest. The outside consultant talks to the human
resources vice president, who talks to the CEO. The CEO says what he'd like to
receive. It gets to the human resources person who tells the outside
consultant. And it pretty well works out that the CEO gets what he's implied he
thinks he deserves, so he will be respected by his peers. (Morgenson, 2005.)
The board of directors buys into what the CEO asks for because the outside
consultant is an "expert" on such matters. Furthermore, handing out only modest
salary increases might give the wrong impression about how highly the board
values the CEO. And if someone on the board should object, there are the three
or four CEOs from other companies who will make sure it happens. It is a
process with a built-in escalator.
As for why the consultants go along with this scam, they know which side their
bread is buttered on. They realize the CEO has a big say-so on whether or not
they are hired again. So they suggest a package of salaries, stock options and
other goodies that they think will please the CEO, and they, too, get rich in
the process. And certainly the top executives just below the CEO don't mind
hearing about the boss's raise. They know it will mean pay increases for them,
too. (For an excellent detailed article on the main consulting firm that helps
CEOs and other corporate executives raise their pay, check out the New York
Times article entitled "America's Corporate Pay Pal", which supports everything
Woolard of DuPont claims and adds new information.)
If hiring a consulting firm doesn't do the trick as far as raising CEO pay,
then it may be possible for the CEO to have the board change the way in which
the success of the company is determined. For example, Walmart Stores, Inc.
used to link the CEO's salary to sales figures at established stores. But when
declining sales no longer led to big pay raises, the board simply changed the
magic formula to use total companywide sales instead. By that measure, the CEO
could still receive a pay hike (Morgenson, 2011).
There's a much deeper power story that underlies the self-dealing and mutual
back-scratching by CEOs now carried out through interlocking directorates and
seemingly independent outside consultants. It probably involves several
factors. At the least, on the workers' side, it reflects their loss of power
following the all-out attack on unions in the 1960s and 1970s, which is
explained in detail in an excellent book by James Gross (1995), a labor and
industrial relations professor at Cornell. That decline in union power made
possible and was increased by both outsourcing at home and the movement of
production to developing countries, which were facilitated by the break-up of
the New Deal coalition and the rise of the New Right (Domhoff, 1990, Chapter
10). It signals the shift of the United States from a high-wage to a low-wage
economy, with professionals protected by the fact that foreign-trained doctors
and lawyers aren't allowed to compete with their American counterparts in the
direct way that low-wage foreign-born workers are.
(You also can read a quick version of my explanation for the "right turn" that
led to changes in the wealth and income distributions in an article on this
site, where it is presented in the context of criticizing the explanations put
forward by other theorists.)
On the other side of the class divide, the rise in CEO pay may reflect the
increasing power of chief executives as compared to major owners and
stockholders in general, not just their increasing power over workers. CEOs may
now be the center of gravity in the corporate community and the power elite,
displacing the leaders in wealthy owning families (e.g., the second and third
generations of the Walton family, the owners of Wal-Mart). True enough, the
CEOs are sometimes ousted by their generally go-along boards of directors, but
they are able to make hay and throw their weight around during the time they
are king of the mountain.
The claims made in the previous paragraph need much further investigation. But
they demonstrate the ideas and research directions that are suggested by
looking at the wealth and income distributions as indicators of power.
Further Information
The 2010 Wolff paper is on-line at http://www.levyinstitute.org/publications/?
docid=1235; Edward Wolff's home page at New York University is at http://
www.econ.nyu.edu/user/wolffe/.
The Census Bureau report is on line at http://www.census.gov/hhes/www/wealth/
wealth.html
The World Institute for Development Economics Research (UNU-WIDER) report on
household wealth throughout the world is available at http://tinyurl.com/
wdhw08; see the WIDER site for more about their research.
For good summaries of other information on wealth and income, and for
information on the estate tax, see the United For A Fair Economy site at http:/
/www.faireconomy.org/. Their research on CEO pay can be found here: http://
www.faireconomy.org/issues/ceo_pay
For some recent data on taxes from a variety of angles -- presented in a number
of colorful charts and graphs -- the Center on Budget and Policy Priorities
created a page entitled "Top Ten Tax Charts" in April 2011.
The New York Times ran an excellent series of articles on executive
compensation in the fall of 2006 entitled "Gilded Paychecks." Look for it by
searching the archives on NYTimes.com.
For a brief 2010 account by tax expert David Cay Johnston on how the owners of
oil pipelines have avoided taxes for the past 25 years simply by converting
from the corporate form of ownership to partnerships, check out his brief video
on YouTube. For the full details, see his column on tax.com.
To see a video of Ed Woolard giving his full speech about executive
compensation, go to http://www.compensationstandards.com/nonmember/
EdWoolard_video.asp (WMV file, may not be viewable on all platforms/browsers)
The Shapiro & Friedman paper on capital income, along with many other reports
on the federal budget and its consequences, are available at the Center on
Budget and Policy Priorities site: http://www.cbpp.org/pubs/recent.html
The AFL-CIO maintains a site called "Executive Paywatch," which summarizes
information about the salary disparity between executives and other workers:
http://www.aflcio.org/corporatewatch/paywatch/.
Emmanuel Saez, Professor of Economics at UC Berkeley, has written or
co-authored a number of papers on income inequality and related topics: http://
elsa.berkeley.edu/~saez/
An update on the lack of wage growth in the 2007-2010 recession ("Recession
hits workers' paychecks") can be found at the Web site of the Economic Policy
Institute.
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First posted September 2005; most recently updated November 2011
This document's URL: http://whorulesamerica.net/power/wealth.html