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WHY IT MATTERS: Income inequality

Updated at: 10/23/2012 12:05 PM
By CHRISTOPHER S. RUGABER

The issue:

The income gap between the rich and everyone else is large and getting larger, while middle-class incomes stagnate. That’s raised concerns that the nation’s middle class isn’t sharing in economic growth as it has in the past. And it sparked the Wall Street protests that spread to other cities in the country.

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Where they stand:

President Barack Obama would raise taxes on households earning more than $250,000 a year, plus set a minimum tax rate of 30 percent for those who earn $1 million or more. He also wants to spend more on education as "a gateway to the middle class."

Republican Mitt Romney blames Obama’s economic policies for failing to create enough jobs so that middle- and lower-income Americans can earn more. He wants to cut taxes more broadly and says that will generate enough growth to raise incomes for all Americans.

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Why it matters:

Income inequality has risen for three decades and worsened since the recession ended. A report in mid-September from the Census Bureau found that the highest-earning 20 percent of households earned 51.1 percent of all income last year. That was the biggest share on records dating to 1967. The share earned by households in the middle 20 percent fell to 14.3 percent, a record low.

Other studies have pointed to huge gains among the top 1 percent, fueling protests by Occupy Wall Street. Last fall, the Congressional Budget Office found that incomes for the richest 1 percent soared 275 percent between 1979 and 2007. For the middle 60 percent of Americans, average incomes grew just under 40 percent.

Two academics, Emmanuel Saez and Thomas Piketty, have used IRS data to construct longer-run assessments of income inequality. They found that in 2007 the richest 1 percent earned 23.5 percent of income. That was the biggest share since 1928, just before the Great Depression.

Some economists argue that these figures overstate inequality. They point out that Saez and Piketty exclude income from Social Security and other government benefits from their calculations. Most studies also don’t count the value of health insurance and other employer benefits, which have risen sharply in recent decades.

But the budget office’s study does include the impact of taxes and government benefits. Few economists dispute that income inequality has worsened in the past three decades.

Poverty has deepened. Fifteen percent of Americans were below the poverty line in 2011, the Census Bureau says, slightly lower than the 15.1 percent in 2010. That was the first drop after four straight years of increases.

But the recession has pushed up the poverty rate sharply since it stood at 11.3 percent in 2000. About 46.2 million people were poor last year, 46 percent more than in 2000.

Government programs such as unemployment benefits and Social Security have lifted millions of Americans above the poverty line. That raises the stakes surrounding future proposals to limit such benefits.

Some economists argue that income inequality contributed to the financial crisis. As middle-class incomes stagnated in the 2000s, Americans borrowed to fuel more consumption and buy larger homes. That caused an explosion in household debt that couldn’t be sustained when the housing bubble burst.

At stake, says Obama, is "the basic bargain at the heart of America’s story, the promise that hard work will pay off." Romney says Obama’s policies have made the middle class poorer. He says he will remove barriers to opportunity, such as excessive regulation of small business, so that more Americans can succeed. "We’re not the party of the rich," he said. "We’re the party of the people who want to get rich."

(Copyright 2012 by The Associated Press. All Rights Reserved.)