Income Gaps

Today, I’ll continue my examination of trends in income based on 20 years of income tax data from the IRS.

Adjusted Gross Income is gross income less selected deductions for the self-employed, students and teachers. In 2007, these were the approximate income “floors” for each percentile of tax returns:
Top 1% – above $410K
Top 5% – above $160K
Top 10% – above $113K
Top 25% – above $66K
Top 50% – above $33K

The graph below shows the percentage of income earned by the top 25% of income earners. Notice the dramatic increase in the past twenty years. (Click graph to enlarge)

The trend of the increase for the top 25% of incomes is steeper than the relatively flat trend of income increases for the top 50% and is mostly due to the steep income increases for the top 5%. Due to the “magic” of compound interest, money has a natural tendency to concentrate. Ever in search of better returns for the risk involved, the concentration of invested money will create bubbles in the economy like the housing bubble of this decade or the technology and internet bubble of the 1990s. If the increasing concentration of wealth in the hands of an ever smaller percentage of the population is not modified, our economy will bounce from one bubble to the next.

The graph below is in constant, or inflation-adjusted, dollars and shows the dramatic increase in incomes for the top earners in this country. The income for the top 50% has remained flat for the past two decades and that includes the large increases of those at the top. Subtracting out the skyrocketing increases in income for the top 5% leaves the other 95% with flat or declining real incomes.

The graph below shows the “gap” between different income groups. In 1986, the gaps between each income group were about the same, excluding the gap between the richest 1% and the richest 5%. In the past two decades, the gap between the upper class and middle class have increased. Top earners have made good gains in the past two decades. Not so for the middle and upper middle class.

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