A 2010 study from Yale University and UC Berkeley published in Politics & Society, “Winner-Take-All Politics: Public Policy, Political Organization and the Precipitous Rise of Top Incomes in the United States,” examines contextual government framework and economic trends around these issues. The results challenge the premise that increasing income inequality can be explained largely by factors such as rising returns to higher education, the technological revolution, and globalization.

The study’s key points include:

• The wealthiest 1% of households have seen significant income gains since 1980, and the more exclusive the group, the greater the gains have been. The top 1% saw incomes rise 2.3 times, the top 0.1 percent more than 4 times, and the top 0.01% — the richest 15,000 families — more than 6 times.
• For the top 0.01%, the average after-tax incomes went from $4 million in 1979 to $24 million in 2005. The share of national income also rose precipitously, from one in every $100 in 1974 to more than one of every $17.
• Between 1979 and 2005, average incomes for the poorest fifth of households rose by just 6% and incomes for the middle fifth rose 21%.
• Growth rates in Europe were actually higher than in the U.S. over this period, yet income inequality did not rise as quickly there. Competitor economies such as Germany saw only tiny increases in income inequality.
• The rise of top-tier incomes from 1960 to 2007 did not show any correlation to “either the business cycle or the shifting partisan occupation of the White House.”
• Shifts toward an education- and knowledge-based economy cannot fully explain increasing inequality: “Those at the top are often highly educated, but so too are those just below them who have been left behind. Put another way, the distribution of educational gains over the last 25 years — who finishes college or gains advanced degrees — has been much broader than the distribution of economic gains.”
• Among the political factors driving increasing inequality has been policy “drift”: the inability of the political system to “adapt to the shifting realities of a dynamic economy and society.” Increasing gridlock between the major parties has, in essence, favored the status quo and preserved outdated rules. A notable example is the low taxation level on hedge fund managers, which results from IRS rules “adopted before hedge funds became a prominent part of the economy.” Another example is the failure to keep up with the importance of stock options in executive compensation packages.
• The number of business organizations that lobby Congress and the scale of the lobbying has increased significantly since the late 1970s. These organizations have succeeded with both Republicans and Democrats alike in dissuading them from restructuring the rules to help address rising income inequality.
• The decline of unions is also a major factor. More than one-third of all workers were in unions in the 1950s; by 2009, that figure had dropped to just 12.3%.
• Targeted changes in tax rates are at the heart of increasing inequality, particularly the declining role of the corporate income tax and the estate tax. “Progressivity used to be very pronounced at the very top of the tax code; now it is almost entirely absent.” In 1960, tax rates were around 70% for the top 0.01%; they are now about half that.

The authors conclude, “Politics and governance have been central to the rise of winner-take-all inequality.”

Tags: inequality, poverty, taxation

By John Wihbey | October 25, 2011