WASHINGTON—Over the past quarter-century, and especially in the last 10 years, America's very rich have grown much richer. No one else fared as well.
In 2004, the richest 1 percent of households—719,910 of them, with an average annual income of $326,720—had 19.8 percent of the entire nation's pretax income. That's up from 17.8 percent a year earlier, according to a study by University of California-Berkeley economist Emmanuel Saez.
The study, titled "The Evolution of Top Incomes," also found that the richest one-tenth of 1 percent of Americans—129,584 households in 2004—reported income equal to 9.5 percent of national pretax income.
However, median, or midpoint, family income rose only 1.6 percent between 2001 and 2004, when adjusted for inflation, according to the Federal Reserve. Median family real net worth—a family's gross assets minus liabilities—rose only 1.5 percent during those four years.
Those are very sluggish income-growth rates compared with the four years between 1998 and 2001, when median family income grew by 9.5 percent and median family real net worth grew by 10.3 percent.
Experts disagree on the causes, but they're in near agreement that this trend threatens to erode a fundamental American belief about fairness.
"It's not the actual getting ahead in America that's so important—it's been Americans' deep belief that they have the opportunity to get ahead. And if you lose that, there's damage to our society," said Douglas Holtz-Eakin, who until last year was the director of the nonpartisan Congressional Budget Office and before that was chief economist for President Bush.
In coming years, income inequality is sure to be a rallying cry in political debates over everything from raising the minimum wage to federal spending on education to overhauling the tax code.
Most theories on why the rich are getting richer focus on why everyone else isn't. Some explanations include the declining power of labor, the influx of illegal immigrants, the offshoring of jobs and global competition that holds down wage growth.
Education has widened income inequality, too. Americans with college degrees earn nearly twice as much as those without them.
But education hasn't been a ticket to income growth lately.
Between 2000 and 2005, workers with four-year college degrees saw their wages fall 3.1 percent, adjusted for inflation. Only two groups, who together make up just 3.4 percent of the workforce, saw inflation-adjusted wages rise. They were workers with doctoral degrees or specialty degrees, such as medicine or law, according to the U.S. Census Bureau.
The soaring pay enjoyed by top CEOs, athletes and entertainers also has added to the widening income divide.
"I'm thinking Tiger Woods causes some income inequality," said Holtz-Eakin. "All of that seems to be part of this, but it still leaves you with a sense of not knowing exactly what it is."
There's a simpler explanation. The very wealthy simply own more assets than the rest of us. That means they benefit more from the booming stock market, which is reaching record highs.
Since 1926, stocks have given investors an average annual return of about 10 percent (with large fluctuations, depending on the years). In 2004, the wealthiest 10 percent of Americans were almost three times more likely to own stock than the broad universe of U.S. families, according to the Federal Reserve.
The median value of stock holdings for the wealthiest 10 percent of Americans was $110,000 per household in 2004, according to Morgan Stanley, the banking giant. The value of stocks held by the other 90 percent of Americans averaged $8,350.
Those numbers lead some to question the fairness of Bush's 2003 tax cuts, which lowered the top rate at which capital gains and dividends are taxed. Individual income tax rates in the top four income brackets were also lowered to 25, 28, 33 and 35 percent.
"We've had a 30-year trend of income inequality. What's new in the last five years is the degree to which tax policy has made that worse, rather than leaned against that trend," said Jason Furman, a senior fellow for the liberal Center for Budget and Policy Priorities and an economist at New York University.
If Democrats capture the House of Representatives on Tuesday, they won't immediately set about trying to reverse the Bush-era tax cuts. Rep. Charles Rangel of New York would head the tax-writing Ways and Means Committee, and he's said he won't seek a rollback but will vigorously oppose extending the cuts beyond 2010, the year they're set to expire.
Some conservatives fear that Democrats will seek to redistribute wealth by revamping the tax code to address income inequality. They defend the status quo by pointing to tax data showing that the rich contribute the greatest share of taxes.
In 2003, the wealthiest 10 percent held 37.2 percent of national income, a 50.2 percent share of all federal tax liabilities and a 69.6 percent share of individual income tax liabilities, according to a Congressional Budget Office tax study.
"We've redistributed income about as much as we can," said James Glassman, a scholar at the American Enterprise Institute, a conservative think tank in Washington.
(c) 2006, McClatchy-Tribune Information Services.
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