Income Inequality Really Has Increased a Lot Since 1973

How much has income inequality increased over the past few decades? This is a matter of some contention, and the answer can depend on things like what inflation rate you use; whether you correct for household size; whether you measure consumption or income; and estimates of non-cash income like health benefits. My preference has always been to look at income shares so the inflation rate doesn’t matter; personal income so household size doesn’t matter; income rather than consumption; and to include as much non-cash income as possible.

However, there’s always been another major critique of income numbers that has to do with technical changes made to tax laws in 1986. Dylan Matthews points to a recent paper on this subject:

What looks on paper like a big increase in inequality in the 1980s and onward, Auten and Splinter argue, is really just money being shuffled around in response to Ronald Reagan-era changes to tax law. In 1980, the top individual income tax rate was 69.13 percent; by 1989, it had fallen by more than half, to 28 percent.

In the 1960s and 1970s, companies usually reinvested their profits rather than giving raises to executives….Reinvesting the money ultimately benefited shareholders in the company by increasing the company’s value, and benefiting shareholders means benefiting rich people….After the tax cuts, companies started directing more money to raises. Rather than exploding actual inequality, Auten and Splinter write, the Reagan tax changes mostly shifted money that used to go to rich people through stocks so that it instead went to rich people in the form of salary.

This is a very technical argument that’s above my pay grade—though I’ll note that the wonks at the CBO don’t think it changes the overall numbers much. However, my own objection to it is fairly simple, and it might be wrong. But here it is anyway for public critique.

The famous income series from Piketty and Saez is the basis for most of these arguments. These are the figures that Auten and Splinter think are overstated. But their critique applies solely to rich people. Workers in, say, the bottom 90 percent never got much income from capital gains and therefore weren’t plausibly affected by the Reagan-era tax changes. If we look solely at this share of the population, here’s what it looks like:¹

Since 1973, the income share of the bottom 90 percent has declined from 47 percent to 32 percent. Obviously this means that the income share of the top 10 percent has increased from 53 percent to 68 percent. This is pretty consistent with an even bigger increase for the top 1 percent.

Don’t take the precise numbers in the chart too seriously—they’re probably a little low across the board—but I think they’re roughly in the right ballpark and show the correct trend. Basically, the idea here is that the income share of the non-rich is easier to measure since it’s mostly wage income and isn’t affected by tax law changes or capital gains measurements. Whatever’s left must be the income of the rich, one way or another. If you do this, the 90-10 measure of income inequality has increased from 113 percent to 213 percent since 1973. That’s a lot.

¹Since this is a tricky derivation, here are the details for data nerds. Income of the bottom 90 percent comes from Piketty & Saez here. Table_Incomegrowth has the income figures and Table A0 has the historical series of total tax units (roughly the same as number of households). I multiplied average income by 90 percent of total tax units to get total income for the bottom 90 percent. National income is here. Piketty & Saez use CPI-U-RS to create real income figures, so that’s what I used to deflate the national income numbers. (I spliced in chained PCE for 1973-77.) The share of total income for the bottom 90 percent is their real total income divided by real national income. The spreadsheet is here.

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

AN IMPORTANT UPDATE

We’re falling behind our online fundraising goals and we can’t sustain coming up short on donations month after month. Perhaps you’ve heard? It is impossibly hard in the news business right now, with layoffs intensifying and fancy new startups and funding going kaput.

The crisis facing journalism and democracy isn’t going away anytime soon. And neither is Mother Jones, our readers, or our unique way of doing in-depth reporting that exists to bring about change.

Which is exactly why, despite the challenges we face, we just took a big gulp and joined forces with the Center for Investigative Reporting, a team of ace journalists who create the amazing podcast and public radio show Reveal.

If you can part with even just a few bucks, please help us pick up the pace of donations. We simply can’t afford to keep falling behind on our fundraising targets month after month.

Editor-in-Chief Clara Jeffery said it well to our team recently, and that team 100 percent includes readers like you who make it all possible: “This is a year to prove that we can pull off this merger, grow our audiences and impact, attract more funding and keep growing. More broadly, it’s a year when the very future of both journalism and democracy is on the line. We have to go for every important story, every reader/listener/viewer, and leave it all on the field. I’m very proud of all the hard work that’s gotten us to this moment, and confident that we can meet it.”

Let’s do this. If you can right now, please support Mother Jones and investigative journalism with an urgently needed donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate