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Inequality and opportunity

The latest economic census data had a depressingly familiar theme: The divide separating the rich and poor in America keeps getting bigger. Indeed, the gap revealed in the numbers released last week is the widest since data collection began nearly 50 years ago.

The census report shows that the top 20 percent of U.S. households in 2009 earned roughly half of aggregate income, compared with 3.4 percent for the bottom 20 percent. Meanwhile, household incomes overall declined for the second year in a row.

This new data will join a small mountain of earlier studies detailing income inequality in this country. Among those is research by economists Thomas Piketty and Emmanuel Saez that showed two-thirds of total income gains from 2002 to 2007 went to the top 1 percent of U.S. households-and that the top 1 percent’s share of income in 2007 was larger than at any time since the start of the Great Depression.

Yet the reality of unequal income distribution is more complex than it appears at a glance. A 2007 report by U.S. Treasury Department researchers who sampled nearly 97,000 tax returns offered persuasive evidence that "the rich" are a group in constant flux. The researchers found that among the wealthiest 0.01 percent of all taxpayers in 1996, only 25 percent remained in the group a decade later. Likewise, nearly 58 percent of the richest 1 percent fell to a lower income group.

Perhaps even more significantly, nearly 58 percent of the poorest taxpayers in 1996 advanced to a higher income category by 2005-and more than 5 percent moved up all the way to the highest quintile in only 10 years. It’s also worth noting that the median real income of all taxpayers rose 24 percent, and two in three Americans saw their incomes increase.

Does income mobility mean inequality is not a problem in this country? No. Even if "the rich" in America do not constitute an exclusive club with locked doors, the concentration of wealth at the top of the income scale has many negative social and economic impacts.

The trick is how to know which policies work to reduce income inequality without hamstringing growth. The goal should not be mere redistribution but greater economic opportunity for all.

10/8/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail rbj@rbj.net.


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