Mind the gap

For those (like Paul Krugman) who are floundering around trying to understand whether or not there’s a link between inequality and capitalist crises, the similarities between 2007 and the situation just before the Great Depression couldn’t be clearer.

The latest study by the Center for Budget and Policy Priorities shows that the gap between the very top and the rest of the recipients of income in the United States increased enormously in the last three decades.

The gaps in after-tax income between the richest 1 percent of Americans and the middle and poorest fifths of the country more than tripled between 1979 and 2007. . .Taken together with prior research, the new data suggest greater income concentration at the top of the income scale than at any time since 1928.

The gap in income between the wealthiest Americans and all others has grown strikingly in recent decades, the CBO data show. In 1979, when the data begin, the average after-tax incomes of the top 1 percent of households were 7.9 times higher than those of the middle fifth of households. By 2007, top incomes were 23.9 times higher than those of the middle fifth — a more than tripling of the income gap.

The gap between the top 1 percent and the poorest fifth of Americans widened even more sharply. In 1979, the incomes of the top 1 percent were 22.7 times higher than those of the bottom fifth. By 2007, top incomes were 74.6 times higher than those at the bottom — more than tripling the rich-poor gap in 28 years.

And for those who think that changing tax rates will solve the problem, the study has the answer:

The bulk of the increase in after-tax income inequality since 1979 reflects changes in pre-tax incomes. The incomes of the top 1 percent rose 141 percent from 1979 to 2007 before taxes are considered, the CBO data show. The top 1 percent’s share of before-tax income (like its share of after-tax income) more than doubled from 1979 to 2007, from 9.3 percent to 19.4 percent.

By 2007, the top 1 percent had before-tax incomes that were 24 times higher than those of the middle fifth of Americans — a share that had nearly tripled since 1979.

The rapidly rising pre-tax incomes of the wealthy help to explain the notable rise in the percentage of total tax revenue collected from these households. CBO’s data show that the share of total federal taxes paid by the top 1 percent of households rose from 25.5 percent in 2000 to 28.1 percent in 2007, the second-highest share since 1979 (only 2006 was higher).

The increase in the share of taxes paid by the wealthy is often cited erroneously as evidence that their tax burden is rising. In reality, the effective federal tax rate for the top 1 percent of households — the percentage of their income that they pay in federal taxes — declined from 33.0 percent of income in 2000 to 29.5 percent in 2007.

The top 1 percent paid a growing share of total taxes chiefly because they received a growing share of total before-tax income: 19.4 percent in 2007, compared to 17.8 percent in 2000.

So, if we want to understand the links between inequality and capitalist crises, we need to start by analyzing the growing gap in the distribution of income prior to the onset of the crises. And if we want to eliminate that gap and avoid the next crisis, we have to move beyond the class structures of capitalism that created them in the first place.