Chapter 4 Wealth and Income

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Lessons from the Parade 1.Many Little People, Few Giants  Only 2% of tax returns show income over $250, Living Standards  Spans from those who cannot afford to own a home to those who own multiple residences. 3.Job(s)  The number of household income earners changes over the parade. 4.Sources of Income  Jobs are the main source of income for most households.  Government transfer payments are crucial for those early in the parade.  Income-producing assets are the largest source of income for those at the very end of the parade.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 Lessons from the Parade, cont. 5.Occupation  Occupational pay scales overlap, even for very different occupations. 6.Women’s Shifting Role  Women’s contribution or share of household income depended on where they were in the parade. 7.Minorities  Overrepresented early on in the parade; strongly represented in the middle; underrepresented toward the end of the parade. 8.Income and the Class Structure  The relationship between the distribution of income and the class structure is clear at the extremes but somewhat blurred in the middle.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 The Distribution of Income The income gap between female- and couple-headed families is greater than between majority and minority families. The income gap between female- and couple-headed families is greater than between majority and minority families. – However, female-headed families are more prevalent among minority households. Male-headed households have higher median incomes and are much less prevalent than female-headed ones. Male-headed households have higher median incomes and are much less prevalent than female-headed ones. One out of every six families is female-headed. One out of every six families is female-headed.

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Sources of Income Wages and salary provide most income for most people. Wages and salary provide most income for most people. Households in the bottom 40% of the income distribution receive a large share of their income in the form of government transfer payments (e.g., Social Security, veterans benefits, and public assistance). Households in the bottom 40% of the income distribution receive a large share of their income in the form of government transfer payments (e.g., Social Security, veterans benefits, and public assistance). At successively higher levels, capitalist income (e.g., stock dividends, interest, and rents) and business profits provide increasing proportions of total income. At successively higher levels, capitalist income (e.g., stock dividends, interest, and rents) and business profits provide increasing proportions of total income.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011

Income Shares The distribution of income is typically analyzed in one of two formats: The distribution of income is typically analyzed in one of two formats: 1.The distribution of households across ranges of income.  Depicted pictorially in the income parade and Table The distribution of income shares among stratified segments of the population.  Total income of all households as a national income pie.  Figure 4.3 reveals that the richest fifth of households is 15 times that received by the poorest quintile.

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Taxes and Tax Transfers The Government as Robin Hood? The federal personal income tax is a progressive tax. The federal personal income tax is a progressive tax. – In other words, people with higher incomes pay a greater proportion of their income to the IRS than do those with lower incomes. There are also what are referred to as regressive taxes (e.g., sales taxes). There are also what are referred to as regressive taxes (e.g., sales taxes). – Regressive taxes take a higher proportion of income at lower income levels. – Low wage workers spend a higher proportion of their incomes on consumer items and, therefore, lose a higher percentage of their incomes to regressive taxes like sales tax.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 Taxes and Tax Transfers The Government as Robin Hood, cont. Government transfer payments and noncash benefits increase the living standards of those families in the lowest income bracket Government transfer payments and noncash benefits increase the living standards of those families in the lowest income bracket However, the post-tax income distribution is largely indistinguishable from the pretax distribution. However, the post-tax income distribution is largely indistinguishable from the pretax distribution. The richest fifth still claims almost half of all personal income. The richest fifth still claims almost half of all personal income.

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How Many Poor? According to the federal government, in 2005 there were 37 million Americans living in poverty, about 13% of the population. According to the federal government, in 2005 there were 37 million Americans living in poverty, about 13% of the population. However, the number of people considered to be in poverty depends on the definition that is used. However, the number of people considered to be in poverty depends on the definition that is used. In chapter 10 we will consider different definitions of poverty in order that you may draw your own conclusions about what this term means. In chapter 10 we will consider different definitions of poverty in order that you may draw your own conclusions about what this term means.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 Women and the Distribution of Household Income Older women are often dependent on the pensions and/or Social Security benefits of their husbands. Older women are often dependent on the pensions and/or Social Security benefits of their husbands. Since women outlive men, they are often put in the precarious position of losing these sources of income and using up their savings. Since women outlive men, they are often put in the precarious position of losing these sources of income and using up their savings. According to the Census Bureau, 5% of cohabiting wives over the age of 65 are in poverty. According to the Census Bureau, 5% of cohabiting wives over the age of 65 are in poverty. – However, 19% of similarly aged women living alone are in poverty.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 Women and the Distribution of Household Income, cont. Divorce impacts women’s income more adversely than it does men’s. Divorce impacts women’s income more adversely than it does men’s. – This is partly a result of child care responsibilities, which tend to borne by women, as well as, the meager child support payments they receive. Men actually increase their economic situation after divorce whereas women tend to experience a deterioration in their economic situation. Men actually increase their economic situation after divorce whereas women tend to experience a deterioration in their economic situation.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 Women and the Distribution of Household Income, cont. From 1960 to 2000, the labor force participation rate of women doubled. From 1960 to 2000, the labor force participation rate of women doubled. As men’s wages have stagnated, women’s contributions to household incomes have become increasingly critical in enabling families to either stay afloat financially or maintain a middle or upper-middle class standard of living. As men’s wages have stagnated, women’s contributions to household incomes have become increasingly critical in enabling families to either stay afloat financially or maintain a middle or upper-middle class standard of living.

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The Distribution of Wealth Income is the inflow of money over a period of time (e.g., wages, interest, dividends); wealth is the value of assets held at a point in time (e.g., real estate, bank accounts, stocks, bonds). Income is the inflow of money over a period of time (e.g., wages, interest, dividends); wealth is the value of assets held at a point in time (e.g., real estate, bank accounts, stocks, bonds). – Wealth enables the maintenance of a particular standard of living in the event of a sudden drop in income. – Most families do not have the type of wealth that would enable them to endure the hardship of going more than a month or two without income. – Wealth provides an important mechanism for the intergenerational transmission of inequality.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 The Distribution of Wealth, cont. Upwardly mobile African Americans with above average incomes lag far behind white peers due to the effects of historical racial inequality. Upwardly mobile African Americans with above average incomes lag far behind white peers due to the effects of historical racial inequality. Wealth is measured in two ways. Wealth is measured in two ways. – Gross assets refers to the total value of assets someone owns. – Net worth is a more realistic concept that refers to the value of assets owned minus the amount of debt owed. Most households derive the greater part of their net worth from three asset types: home equity, car equity, and bank deposits. Most households derive the greater part of their net worth from three asset types: home equity, car equity, and bank deposits.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 The Distribution of Wealth, cont. There are three broad classes of wealth holders: There are three broad classes of wealth holders: 1.The Near Propertyless Class  In 2007, about 35% of households had net worths under $50,000.  Most net worths are under $25,000, while some have negative net worths. 2.The “Nest Egg” Class  About 55% of households had net worths between $50,000 and $900, The Investor Class  Just 10% of households had net worths greater than $900,000.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 The Distribution of Wealth, cont. The concentration of wealth at the top is so great that the top 1% now holds more net worth than the bottom 90%. (This is shown in Table 4.7.) The concentration of wealth at the top is so great that the top 1% now holds more net worth than the bottom 90%. (This is shown in Table 4.7.) Ownership of corporate stock and mutual fund shares, bonds, investment real estate, and small business equity is almost entirely concentrated in the hands of the top 10% of wealth holders. Ownership of corporate stock and mutual fund shares, bonds, investment real estate, and small business equity is almost entirely concentrated in the hands of the top 10% of wealth holders.

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Trends in the Distribution of Wealth The trend toward increasing inequality in the distribution of wealth was especially notable in the 1980’s. The trend toward increasing inequality in the distribution of wealth was especially notable in the 1980’s. The wealth of the richest 1% has grown spectacularly since the mid-1970’s. The wealth of the richest 1% has grown spectacularly since the mid-1970’s. At the same time that the wealthy have become wealthier, more Americans have become wealthy. At the same time that the wealthy have become wealthier, more Americans have become wealthy. The number of millionaire households has doubled in the decade following The number of millionaire households has doubled in the decade following 1995.

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Trends in the Distribution of Wealth, cont. Gilbert identifies four factors that are important in accounting for the large increases in the number of wealthy families and the concentration of wealth: Gilbert identifies four factors that are important in accounting for the large increases in the number of wealthy families and the concentration of wealth: 1.The rapid growth of incomes at the top of the distribution. 2.The fortunes that have been made in the new information technology and other high-growth sectors of the economy. 3.Declining tax rates for the top income bracket. 4.The rise in the stock market since the early 1980s.

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011 Trends in the Distribution of Income By the year 2000, the ratio between the incomes of the bottom 40% and the top 5% was the highest ever measured in 50 years of government income surveys. By the year 2000, the ratio between the incomes of the bottom 40% and the top 5% was the highest ever measured in 50 years of government income surveys. During the Age of Shared Prosperity (1945 to early 1970’s) income growth was generally higher and more broadly shared. During the Age of Shared Prosperity (1945 to early 1970’s) income growth was generally higher and more broadly shared. During the Age of Growing Inequality (mid 1970s +) income growth was fastest at top of the income distribution. During the Age of Growing Inequality (mid 1970s +) income growth was fastest at top of the income distribution.

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Income Dynamics There are few studies documenting the way in which individuals move up or down the income distribution over time. There are few studies documenting the way in which individuals move up or down the income distribution over time. – These types of studies are both difficult and expensive to conduct. – The few existing studies have shown that individuals do tend to increase their incomes over their careers as they gain experience and successive promotions. – They have also revealed a slowing of income mobility with fewer families moving up or down but remaining closer to where they were 10 years prior.  Finally, the tendency for families to move from either extreme of the income distribution in the course of a decade is quite rare.

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Changing Federal Tax Rates Effective tax rates have fluctuated over the years. Effective tax rates have fluctuated over the years. – The nature of changes in the tax code are largely a function of whether there is a Republican or Democratic administration in office. Despite tax changes that have benefited those at differing positions in the income and wealth distribution, the overall result has been that those at the highest point in the income distribution have seen their effective tax rates decline most from Despite tax changes that have benefited those at differing positions in the income and wealth distribution, the overall result has been that those at the highest point in the income distribution have seen their effective tax rates decline most from

© Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011