Occupy Wall Street and the Real Numbers of Income Inequality

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, David Leonhardt, Washington bureau chief for The New York Times, went through the stats that have been thrown around by Occupy Wall Street protesters and their critics, and talked about what the income inequality picture really looks like.

Occupy Wall Street has been going on now for several weeks and there's a lot of talk about income inequality, taxes and wealth disparity. Each side has their own set of numbers to throw out, so let's set aside the chanting for a moment and see what they really mean.

"In 1976, the top 1 percent of earners in the U.S. took in 8.9 percent of all income. By 2007, that number had risen to 23.5 percent."

According to David Leonhardt, this idea basically holds true.

If you go back a decade, incomes for most of the population haven't risen at all. If you go back to the 70's, they've risen but only slowly where as incomes at the very top have risen really quite quickly so the top 1 percent now controls about 28 percent of the national income and the top 10 percent earns about 50 percent of the income...

We have significantly higher income inequality than other rich countries...what that tells you is that it isn't something that is common to the entire affluent world, that inequality has risen as much as it has in this country. 

And there are reasons for this, according to Leonhardt − one is the growth of finance, another is tax policy from Washington, but Leonhardt said one other biggie is education.

We have done a significantly worse job of increasing our educational attainment than any other rich country. And so what that means is that we've had a smaller growth in high skill workers than those other countries have. High skill workers earn more and so when you have a smaller pool of high skill workers, you're going to have more inequality...

"The bottom 50 percent of income earners in the U.S. now collectively own less than 1 percent of the nation's wealth."

The very bottom of the earning pool has a net worth of nearly zero, Leonhardt said, and sometimes their debts are equal to what they own, but it's important to look not only at income inequality, but also at wealth inequality.

Wealth inequality tends to be higher than income inequality because net worth at the bottom is just so small and net worth at the top is so large that it's even bigger than the gap in income... Wealth matters as well. If you're income goes down and you're wealthy, you can just dip into your wealth and make it up.

"In the U.S., the numbers about earners - who's in the bottom and who's in the top - are not static."

Leonhardt said, this used to be the case, but it doesn't seem to be the case anymore.

We have more of a culture of equality in this country. We don't have nobility from the past, we have a belief that you can rise, but inequality has gotten so big in this country that the rungs on the ladder are further apart than they used to be and further apart than they are in other countries and so it's harder to jump from one rung to another than it used to be.

I do think it's important to say that sometimes this inequality and stagnation argument gets exaggerated. The fact is income growth has been almost non-existent for a decade for most Americans...but you often hear that tipped into a zone that I don't think touches reality. The middle class in this country is not disappearing in any solid definition of it. The fact is that most people are making more money than their parents did, even after you control for the cost of everything...we are still richer today than we were a generation ago.

"The top 1 percent pay a disproportionate amount of taxes."

It is true that the top percentage of the rich pay a greater share of taxes than they used to, Leonhardt said, but there are a few things at work here.

There are two things that go on with tax shares. One is how much money you're making and two is, how much tax you pay on each dollar of that money. The tax rates for the rich have actually declined quite markably over the last generation... People at the very top, millionaires, the top one one thousandth were actually paying an average federal total tax rate of more than 50 percent in 1980. That's fallen down to about 30 percent so tax rates for the rich have fallen and they've fallen much more than they've fallen for any other group.

So, how is it that their rates have fallen, but they're paying more taxes than they used to?  It's because the rich are making much more money than they used to.

Each dollar they earn is taxed less than it used to be, but because inequality has gone up, because the top 1 percent is earning so much more than it used and because they do still pay higher tax rates than everyone else, they just pay much lower tax rates than they used to, they pay a very high percentage of taxes and they pay a greater share than they used to. The problem is that when you hear that argument, what's often implied is that their taxes have gone up. In fact the opposite has happened. Their taxes have gone down and their income has gone up...

A chart going around the web shows the ratio of pay of a CEO compared to that of an average work in countries around the world. Germany is 12:1, Venezuela is 50:1 and the U.S. is 475:1.

Leonhardt said this chart is a bit exaggerated, but broadly accurate. He explained that this statistic likely has something to do with tax codes.

If you have higher top marginal tax rates, CEO's and others are less likely to fight for the last dollar of income because you know you're not going to get as much of it. Where as if you have lower marginal tax rates, and we've really lowered our top marginal tax rates, you get to keep more of the money and so that 20 millionth dollar means more to you.

When you have broad numbers of people saying, wait a second, my life isn't getting better economically, that is a recipe for a whole lot of political turmoil and that's what we're seeing now... People are frustrated and when you dig into the numbers you emerge having some understanding for why they're frustrated.