Student Questions: The Gap Between Rich and Poor

Editor’s note: This week, the Business Desk continues to feature questions from students in three high schools around the country.

Question: Why is the financial gap between rich and poor continuing to get wider? — Stephanie, senior, Carle Place High School, Carle Place, N.Y.

Paul Solman: In America, you mean? Numerous explanations are given. Let me count the ways.

1) “Skilled” Americans have more to sell to the rest of the world; “unskilled” Americans have less, because they’re competing with similarly unskilled workers the world over, who are willing to take less for their work.

2) Because of communications technology, the highly skilled can make more than ever, since they can sell their goods or services the world over.

3) Because the tax code has become so much less progressive. When Ronald Reagan became president in 1980, the top marginal rate (on the highest income earners) was 70 percent. It went as low as 28 percent, and today it’s 35 percent. The capital gains tax on investment income has gone down too. If you tax rich people less, they’ll keep more of what they earn and move away from the rest.

There’s a nice graph on Wikipedia that depicts what’s happened to America’s income distribution the past 60 years.

Here’s Frank Levy, an economist who has long studied income distribution, writing for the Library of Economic and Liberty’s Concise Encyclopedia of Economics:

“The 1990s and early 2000s witnessed the establishment of a growing body of work, increasingly precise, describing how the income distribution has changed.

The distribution of pretax income in the United States today is highly unequal. The most careful studies suggest that the top 10 percent of households, with average income of about $200,000, received 42 percent of all pretax money income in the late 1990s. The top 1 percent of households, averaging $800,000 of income, received 15 percent of all pretax money income.

In the longer view, the path of income inequality over the twentieth century is marked by two main events: a sharp fall in inequality around the outbreak of World War II and an extended rise in inequality that began in the mid-1970s and accelerated in the 1980s. Income inequality today is about as large as it was in the 1920s.”

The distribution of wealth, by the way, is even more unequal.