The threat of an impending fiscal cliff has sparked intense conversations about whether upper income citizens are paying their fair share of taxes. But equally important-and perhaps more important in the long term–is the issue of income inequality.
A new report by the Center on Budget and Policy Priorities and the Economic Policy Institute, two Washington-based think tanks, documents the growing gap between rich and poor as well as between rich and middle-class families. That pattern holds true both nationally and at the state level.
The report, titled, “Pulling Apart: A State-by-State Analysis of Income Trends,” found that “over the past three business cycles prior to 2007, the incomes of the country’s highest-income households climbed substantially, while middle- and lower-income households saw only modest increases.
“During the recession of 2007 through 2009, households at all income levels, including the wealthiest, saw declines in real income due to widespread job losses and the loss of realized capital gains. But the incomes of the richest households have begun to grow again while the incomes of those at the bottom and middle continue to stagnate, and wide gaps remain between high-income households and poor and middle-income households which saw only modest increases.”
The poorest fifth of households in the U.S. had an average income of $20,510. The top fifth had eight times as much–$164,490.
“On average, incomes fell by close to 6 percent among the bottom fifth of households between the late 1990s and the mid-2000s, while rising 8.6 percent among the top fifth,” the report also found.
“Incomes grew even faster-14 percent-among the top 5 percent of households.
A similar gap existed been top earners and middle-class households.
“On average, incomes grew by just 1.2 percent among the middle fifth of households between the late 1990s and the mid-2000s, well below the 8.6 percent gain among the top fifth,” the report stated. “Income disparities between the top and middle fifths increased significantly in 36 states and declined significantly in only one state (New Hampshire.)”
The report contains charts that show how income equality plays out at the state level.
The state with the largest household income gap was New Mexico, where the bottom fifth averaged $16,319 annually and the top fifth of households earned $161,162, a top-to-bottom ratio of 9.9. New Mexico was followed, in order, by Arizona, California, Georgia, New York, Louisiana, Texas, Massachusetts, Illinois and Mississippi.
New Mexico also had the greatest gap between the middle fifth of households ($51,136) and top fifth ($161,162), a ratio of 3.2. New Mexico was followed, in order, by California, Georgia, Mississippi, Arizona, New York, Texas, Oklahoma, Tennessee and Louisiana.
Those gaps were even larger when poor and middle-class households were compared with the top 5 percent of all earners. For example, the income of the top 5 percent of households was 13.3 times the average income of the bottom fifth. The ratio was more than 15 times that in Arizona, New Mexico, California, Georgia and New York.
According to the report, the major reason for the growing economic disparity has been the stagnant wages for workers in the low and middle-income brackets while wages of the highest paid employees have grown significantly.
“The erosion weakness of wage growth for workers at the bottom and middle of the income scale reflects a variety of factors,” the report noted. “Over the last 30 years, the nation has seen increasingly long periods of high unemployment, more intense competition from foreign firms, a shift in the mix of jobs from manufacturing to services, and advances in technology that have changed jobs. The share of workers in unions also fell significantly.
“At the same time, the share of the workforce made up of households headed by women-which tend to have lower incomes-has increased.
“Government policies such as the failure to maintain the real value of the minimum wage and to adequately fund supports for low-wage workers as well as changes to the tax code that favored the wealthy have also contributed to growing wage inequality.”
Authors of the report made the following recommendations for narrowing the inequality gap:
* Raise and index the minimum wage;
* Improve and extend unemployment insurance;
* Make state tax systems more progressive by weighing the impact of sales tax and user fees on low-income families and
* Strengthening the safety net.
“The consequences of growing income inequality reach beyond individual families,” the report stated. “For instance, in order to compete in the future economy, states and the nation as a whole need a highly-skilled workforce. But research shows that children from poor families don’t perform as well in school and are likely to be less-prepared for the jobs of the future. “Moreover, as income gaps widen, wealthy households become increasingly isolated from poor and middle-income communities. This hurts the nation’s sense of community and shared interests, for example, undermining support for public schools and other building blocks of economic growth.”