Visualizing inequality in the US: The wealthier 3000 people own more than the middle class, 60 million people.
It’s 1984 in the United States and Reagan just started his second term. Mark Zuckerberg, who will one day become the third richest person in the world, is about to see the sun for the first time. The economy is booming and unemployment is finally being reduced. In that year, the poorest 50% of the population had a combined wealth of $600 billions, the middle class owned wealth valued on $1.5 trillions, and the top 0.001% held $358 billions (Figure 1).
Fast forward to 2014, and the poorest 50% has now negative wealth (i.e. debt) equal to $124 billions, the middle class has a combined wealth of $3.3 trillions and the top 0.001% holds $4.8 trillions (Figure 1). In this year, the bottom 100 million people in the United States have only debts, and the top 0.001% (3189 people) own more that the 64 million people in the middle class.
Figure 3 shows the evolution of each group over time. After 1990 the poorest 50% of the population started losing wealth, and their net wealth became negative during the 2007 financial crisis, since it hit the main asset of the middle class: housing.
So what it the causes behind the rise of inequality? It is a highly controversial topic. Part of it may be due to the high share of income that goes to elite professionals (e.g. lawyers, physicians) and financial managers (eg. executives, bankers). For a detailed account see the next article:
Dispelling misconceptions about what’s driving income inequality in the U.S. Income inequality inspires fierce debate…www.nytimes.com
The second part is the “rich-get-richer” mechanism. Wealthy people have access to better investments. While the middle class has the majority of their wealth invested in a house, the wealthy has it invested in companies. This is reflected in how much money is made from capital income (income generated by assets and investments, such as dividends, interest, or capital gains). While the bottom 90% of the population makes basically no money from their wealth, a person in the top 0.1% makes over $1 million a year on capital income alone (Figure 4).
The third part is the redistribution system. Wealthy people have also access to lower taxation. The tax system in the US is progressive (rich people face higher tax rates), but this trend breaks down for the super rich. The top 0.001% pays an effective tax rate of 17.6%, while the top 1% faced an effective tax rate of 22.8%. This is caused by two factors. Firstly, taxes on capital income are much lower than taxes on labor income. The highest possible taxes on capital gains are set at 20%, but taxes on labor are 39.6%. Secondly, the wealthy have access to the offshore world. While the average Joe cannot avoid taxes, rich people can easily move their wealth offshore and avoid taxes altogether.
All data comes from the World Income Database (http://wid.world/). Thanks to Dawid Walentek for useful discussions and pointers.