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Richest Americans' share of national income hit postwar record in 2005; Bottom 50% earned 12.8% of all income
By Finfacts Team
Oct 12, 2007, 07:39

Real” refers to income after adjusting for inflation. The adjustment is based on percentage changes in prices between earlier years and 2005 and is computed by dividing the annual average Consumer Price Index Research Series for 2005 by the annual average for earlier years. Compared with 1967, the first year for which household income statistics are available, real median household income has increased 30.9 percent. Economist Robert Gordon estimates that real median earnings per hour in the US have hardly increased since 1966. He says that the top 10% have captured 50% of the income gains in the past forty years. The top 1% gained more than all the bottom 50%. SEE: US superearners take lion's share of productivity gains

The Wall Street Journal reports today that the richest Americans' share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fuelling anxiety among American workers.

The Journal says that the wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.

The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.

The IRS data, based on a large sample of tax returns, are for "adjusted gross income," which is income after some deductions, such as for alimony and contributions to individual retirement accounts. While dated, many scholars prefer it to timelier data from other agencies because it provides details of the very richest -- for example, the top 0.1% and the top 1%, not just the top 10% -- and includes capital gains, an important, though volatile, source of income for the affluent.

The Journal says that IRS data go back only to 1986, but academic research suggests the rich last had this high a share of total income in the 1920s. It says that scholars attribute rising inequality to several factors, including technological change that favours those with more skills, and globalization and advances in communications that enlarge the rewards available to "superstar" performers whether in business, sports or entertainment.

President Bush told The Wall Street Journal, President Bush in an interview yesterday, "First of all, our society has had income inequality for a long time. Secondly, skills gaps yield income gaps. And what needs to be done about the inequality of income is to make sure people have got good education, starting with young kids. That's why No Child Left Behind is such an important component of making sure that America is competitive in the 21st century."

Former US Treasury Secretary Lawrence Summers and others have warned in recent times that the huge earnings of those towards the top of the economic pyramid, with CEOs making huge multiples of typical worker earnings, while the income of average Americans remains static, is a recipe for promoting protectionism.

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