Thursday, May 19, 2011

Inequality and public debt in the US

Arguably two of the biggest challenges facing the US economy are widening inequality and unsustainable deficits and debts. The CBPP has some excellent graphics on both problems.

First, the graphic below highlights the explosive growth in after-tax incomes at the very top of the income ladder since the eighties. Among the OECD countries US has the highest income inequality after taxes and transfers. Its taxation and transfers system does very little to lower income inequality, with its social security benefits being among the least effective.

The gap between the top 1 percent and the poorest fifth of Americans widened sharply - more than tripling from 22.7 times to 74.6 times in the 1979-2007 period.

And one of the most important driving forces behind this widening - declining tax rates at the top, even as incomes balloon. With an average income of $270 million in 2008, the typical household in the Top 400 made 4,700 times as much as the average American filing a 1040 form. This CBPP chart shows that between 1992 and 2008, the average share of their incomes that these households paid in federal taxes dropped from 26 percent to 18 percent, while their annual incomes shot up by over 700 percent, after inflation.

It is widely believed that the fiscal stimuluses and financial bailouts are the major culprits for America's massive public debts. However, the CBPP graphic shows that they form a very minuscule share. The economic downturn (and consequent reduction in revenues), President Bush’s tax cuts and the wars in Afghanistan and Iraq explain virtually the entire deficit over the next ten years.

Update 1 (29/8/2011)

Excellent link to articles on inequality in the US here.

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