Income Inequality in the US

Income Inequality in the US

Student’s Name

Date

Institutional Affiliation

Introduction

Growing income inequality is one of the biggest challenges that the US has faced. Recent crises such as the 2007 to 2009 recession further increased the income gap between upper-class and lower-class households and shrank middle-class households. The rates of income inequality differ from one state to another, and it is apparent that the rich are getting richer quickly. In contrast, middle-class and lower-class families have a lower income growth rate resulting in stagnation. The rates of income inequality in America are among the highest among developed nations. Income Inequality results in social and political dysfunction. Addressing this problem is crucial to ensuring better income distribution and spurring economic growth for people across all social classes. Income inequality is an ever-growing problem that needs to be addressed to ensure the country’s economic, social, and political wellbeing.

Income Inequality Rates

Income inequality in the US is among the highest among all developed nations. Over the last five decades, high-earning households have brought in more than half of the country’s total income. According to the US Census Bureau, the median household income in 2020 was $67, 521 and the households that brought in an annual income of more than $100 000 were less than 20% of the country’s households (Shrider et al., 2021). Income inequality has been on the rise in each state in the country since the 1970s. However, the rates of income inequality have risen further after the 2007 to 2009 recession, with the top 1% growing their incomes faster than the bottom 99%. Between 2009 and 2015, this top 1% earned half, or more than half, of all the income growth, witnessed across states (Sommeiller & Price, 2018). As of 2015, families in the top 1% brought in an annual income 26.3 times higher than families in the bottom 99%. Levels of income inequality are not similar in all states as regions have top income earner households that bring in more income than the bottom 99%. For instance, in 2015, high-income households in New York brought in 44.4 times more annual income than low-income households. Also, most high-income families resided in states such as New York, California, Texas, Florida, and Illinois. The high-income families from these states accounted for up to 40% of the country’s total income (Sommeiller & Price, 2018).

Income Growth Rate

Income growth rates have also been significantly skewed between the top income earners and the bottom income earners. Before the 2007 to 2009 recession, top income earning families experienced an income growth that accounted for 58.7% of the total income growth witnessed in the country. However, after the recession, 85.1% of the total income growth was only witnessed among the top-income families. In contrast, families with low annual income experienced income growth of 0.7% to 10.3% between 2009 to 2015 (Sommeiller & Price, 2018). While the percentage of income growth garnered by the bottom income earners increased with time, these figures indicate that the top income families grew their income average faster than the bottom income families. This unequal distribution of income growth was also witnessed across states. States with a high number of top-earning households had significantly higher income growth rates than other states. For instance, in 2015, the average income of the top-earning households in New York was $2.2 million, while the average income of the top-earning households in New Mexico was $615 thousand (Sommeiller & Price, 2018).

With the growth of income tipping in favor of upper-income households, America’s middle class is slowly shrinking. During the 1970s, most Americans belonged in the middle as they comprised a clear majority of up to 60% of adults (Horowitz et al., 2020). However, this figure has shrunk over the decades, signifying a downsizing in the number of American households that can generate enough income to belong in this category. In addition, households generating middle-class income have not grown at the rate witnessed in upper-income households. For instance, between the 1970s to 2018, the median middle-class income grew by 49%, while the upper-class income grew by 64%. Also, the percentage of the aggregate income going to middle-class households fell by 19% (Horowitz et al., 2020). These income trends, coupled with the data highlighted above, are clear indicators of the growing income inequality in the USA.

Income Inequality in Other Developed Nations

Compared to other advanced economies, America ranked highest in its levels of income inequality. Income inequality across different countries is measured using the Gini Coefficient, with 0 representing the perfect rate of equality to 1 representing the perfect rate of inequality. According to the World Bank estimates, America’s Gini coefficient was 0.434 in 2018 (Horowitz et al., 2020). This figure was the highest among the G7 countries. In 2018 France had a Gini coefficient inequality rate of 0.326, the UK recorded a rate of 0.392, and most Eastern Europe countries recorded low Gini coefficient rates of below 0.25 (Horowitz et al., 2020). Despite having a high income per capita, the US’s high rate of inequality is due to poor redistribution of resources and inefficiency in the tax system used. The tax system in the US rewards top earners resulting in wealthy households saving billions in taxes. In contrast, the tax systems in developed nations with a similar income per capita as the US but a lower income inequality Gini coefficient is due to tax systems that redistribute resources.

Effects of Income Inequality

Income inequality adversely affects economic growth, resulting in political and social dysfunction. Wealthy households tend to spend less of their income, resulting in a lower economic demand that lowers future economic growth rates. Income inequality promotes political and social dysfunction as wealthy households exert their influence in various government functions, further entrenching their power in society. There is a need for more progressive tax policies that focus on redistributing wealth across households of all social classes to address the income inequality problem in America. The proposed wealth tax is one of the suggested tax policies that has gained popularity since its championing in 2020. This policy aims to tax households with an accumulative wealth of more than $100 million with a 20% tax on their income, including taxation on unrealized gains from stocks (Siripurapu, 2020). Increased access to higher education by introducing low tuition fees in public colleges and canceling students’ loans is another measure proposed to reduce income inequality rates in the country.

Conclusion

Income inequality is an ever-growing problem in America. Income inequality has resulted in the disproportional distribution of wealth and power. As the rich get richer, their influence and power increase, further affecting the economic, social, and political wellbeing of the country. Addressing the problem of income inequality ensures economic prosperity and promotes social and political stability.

References

Horowitz, J. M., Igielnik, R., & Kochhar, R. (2020). Most Americans say there is too much economic inequality in the US, but fewer than half call it a top priority. Washington, DC: Pew Research Center.

Shrider, E. A., Kollar, M., Chen, F., & Semega, J. (2021). Income and poverty in the United States: 2020. Current Population Reports. US Census Bureau.

Siripurapu, A. (2020). The US Inequality Debate.

Sommeiller, E., & Price, M. (2018). The new gilded age: Income inequality in the US by state, metropolitan area, and county.