TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, November 25, 2011

Tyson: Tackling Income Inequality

New York Times op-ed, Tackling Income Inequality, by Laura D’Andrea Tyson (UC-Berkeley, Haas School of Business):

The Occupy Wall Street protesters have focused attention on rising income inequality in the United States, and they are right to do so.

Income and wealth disparities have reached levels not seen in the United States since the Roaring Twenties. And the concentration of income and wealth contributed to the speculative excesses that brought on the 2008 financial crisis (see Robert Reich’s “Aftershock” and Raghuram Rajan’s “Fault Lines”). ...

In the last 20 years, inequality has been largely a story of a small elite – not just the top 1%, but the top 0.1% – pulling away from everyone else in every source of household income: labor income, capital income and business income.

The top 1 percent’s share of national income has also been rising in most other advanced industrial countries, but it is by far the largest and has grown the most in the United States (see Jacob Hacker and Paul Pierson’s “Winner-Take-All Politics”). ...

Growing inequality in labor compensation played a major role in increasing income inequality between the top 1% and the rest of the population from 1979 to 2007. Over the period, however, both the growing inequality in business income, including income from small firms, partnerships and S corporations, and in capital income in the form of dividends, interest and capital gains, as well as the rising share of these forms of income in household income, played a more significant role, especially after 2000.

According to the Congressional Budget Office, from 2002 to 2007 more than four-fifths of the increase in income inequality was the result of an increase in the share of household income from capital gains, with the remainder the result of an increase in other forms of capital income.

Capital and business income are much more unevenly distributed than labor income and have become more so over time. Capital gains income is the most unevenly distributed — and volatile — source of household income.

The concentration index is a measure of the inequality of income from different sources among households. The index ranges in value from zero to one, with zero indicating complete equality in the distribution of an income source among households and 1 indicating complete inequality (for example, if one household received all of the income from that source).

The top 0.1% earns about half of all capital gains, and such gains account for about 60% of the income of the top 400 taxpayers.

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