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A look at the income inequality in the united states

Share It is not surprising that income inequality has been a major topic in the U.

A Brief History of Income Inequality in the United States

Near the end of 2013 the Economist published an article claiming that out of any highly developed nation in the world the U. With a host of social ills correlated with high levels of income inequality, it is crucial we figure out how to reduce America's income inequality.

Fortunately, history gives us a useful guide to policies that can be implemented to do just that. A brief history of income inequality in the U.

  • There are two main explanations proposed for this;
  • There was never any intention of it being used to redistribute wealth; instead, it was used to compensate for the lost revenues of reducing excessively high tariffs, of which the rich were the main beneficiaries;
  • Average productivity growth has been up 1;
  • Meanwhile, heavily homogenous areas with high Germanic and Scandinavian populations — like the West — tended to have the most income equality, he found.

Being strongly advocated by agrarian and populist parties, the income tax was introduced under the guise of equity, justice, and fairness. One Democrat from Oklahoma, William H. There was never any intention of it being used to redistribute wealth; instead, it was used to compensate for the lost revenues of reducing excessively high tariffs, of which the rich were the main beneficiaries.

  • But since then, real labor compensation has grown significantly more slowly than productivity;
  • Or, why is their relative income growing so fast?
  • As noted above figure 2 , the lower half of the income distribution has been losing ground to higher-income people;
  • This left workers without much left to lose, leading to organized pressure for policy reforms.

While the relationship between marginal tax rates and income inequality is interesting, it is also worth mentioning that at the beginning of the twentieth century, total union membership in the U. To read more, see: Are Labor Unions Effective? From the Great Depression to the Great Compression While the Great Depression served to reduce income inequality, it also decimated total income, leading to mass unemployment and hardship.

This left workers without much left to lose, leading to organized pressure for policy reforms. Further, progressive business interests that believed part of the economic crisis and inability to recover was at least partly due to less than optimal aggregate demand as a result of low wages and incomes.

These factors combined would provide a fertile climate for the progressive reforms enacted by the New Deal. During this time, median compensation increased and labor productivity approximately doubled, increasing total prosperity while ensuring that it was being shared more equitably.

Such a high rate acts as a cap on incomes as it discourages individuals from negotiating additional income above the rate at which the tax would apply and firms from offering such incomes. This period of income compression has been aptly named the Great Compression. From the Great Divergence to the Great Recession The shared prosperity of the decades following World War II would come to an end during the 1970s, a decade characterized by slow growth, high unemployment, and high inflation.

  • If the problem is political, then a solution would involve significant political reform—an area where economics can provide little guidance;
  • Figure 10 Link to Figure 10 Copy Although all three proposed causes may have had some impact on income inequality, the real question is the relative size of each;
  • There is no consensus among economists about which hypothesis is more important at this point.

This dismal economic situation provided the impetus for new policies that promised to stimulate more economic growth. Unfortunately, it meant growth would return but the main beneficiaries would be those at the top of the income ladder. Labor unions came under attack in the workplace, courts and in public policy, top marginal tax rates were reduced in an attempt to direct more money towards private investment rather than in the hands of government, and deregulation of corporate and financial institutions were enacted.

In 1978, labor union membership stood at 23. How does the marginal tax rate system work? The decline in union membership and reduction of marginal tax rates roughly coincides with increases in income inequality which has come to called the Great Divergence. These numbers are eerily close to those reached in 1928 that lead to the crash that would usher in the Great Depression.

Income Inequality Is Growing Across the U.S. — Here’s How Bad it Is In Every State

The Bottom Line History can be a helpful guide to the present. Far from accepting the current economic situation as inevitable, a brief history of income inequality in the U. With the last thirty-five years being disproportionately favorable to the wealthy, and the fact that greater income inequality has been correlated with higher levels of crime, stress, mental illness, and some other social ills, it's about time to start leveling the playing field once again.

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