The US income distribution is not stable: the rich are getting richer and the poor are staying poor.

By “income distribution” I mean how many people make $1,000/year, how many make $10,000/year, all the way up to how many people make $1,000,000/year.  I’m talking about the probability that someone, say in the United States in 2020, has any particular income: a probability distribution. Often economists talk about income “deciles”, for example the lowest income “decile” is the  average income of that tenth of people in the US who make the least money; other times they will talk about the “top 1 percent”, or the hundredth of people who make the most money.

What sort of income distribution do we want?  My baseline goal is a stable distribution; i.e. there are about the same number of rich, middle-class, and low-income people over time. This stable distribution ensures that the number of low income people is not growing (of course I’d prefer it even better if we could eliminate all poverty; let’s save that for another day).  Unfortunately at present, the rich are getting richer, while all the rest stay the same, or even lose income. 

Many economists have described this growing inequality, for example Piketty, Saez, and Zucman; they used US government data to generate the figure above. In 1980, the people in the lowest income percentiles saw the largest income growth, higher than the richest people, who saw the lowest growth. This had the tendency to move the lowest income people, and the richest both into the middle class. Today, things are dramatically different; the people in the lowest incomes do not see their incomes grow at all: they see zero income growth. Meanwhile, the figure shows that in 2014 (I think it’s similar in 2020), the highest income people see the highest income growth each year. So the rich are getting richer, and the poor are staying poor, while the middle class shrinks.

This has been happening for the past forty years; let’s imagine this continues for another forty years.  The people in the lowest five percent are not increasing their income at all; they generally are not going to be able to move up. That five percent who are not making anything at all will become a much larger group, say 20%. The number of people who are rich will grow, and will continue to see their income and wealth grow. In forty years we will be dramatically more divided between rich and poor. There will be a dramatically smaller middle class. The income distribution in the US is not stable.

What can we do to fix this?  The easiest mechanism is to go back to something the income tax structure of 1970, which acted as negative feedback to make the number of people in the middle class stable.  The highest income people would pay something like 70% income tax, while those in the lowest income brackets would pay zero (or nearly zero) income tax. This would stabilize the income distribution. In my next post I’ll talk more about this progressive income tax.