Chapter 4 Wealth and Income. © Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011.

Chapter 4Chapter 4

Wealth and IncomeWealth and Income

© Pine Forge Press, an Imprint of © Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011SAGE Publications, Inc., 2011


Lessons from the ParadeLessons from the Parade1.1.Many Little People, Few GiantsMany Little People, Few Giants

Only 2% of tax returns show income over $250,000.Only 2% of tax returns show income over $250,000.

2.2.Living StandardsLiving Standards Spans from those who cannot afford to own a home to Spans from those who cannot afford to own a home to

those who own multiple residences.those who own multiple residences.

3.3.Job(s)Job(s) The number of household income earners changes over The number of household income earners changes over

the parade.the parade.

4.4.Sources of IncomeSources of Income Jobs are the main source of income for most households.Jobs are the main source of income for most households. Government transfer payments are crucial for those early Government transfer payments are crucial for those early

in the parade.in the parade. Income-producing assets are the largest source of income Income-producing assets are the largest source of income

for those at the very end of the parade.for those at the very end of the parade.


Lessons from the Parade, Lessons from the Parade, cont.cont.

5.5. OccupationOccupation Occupational pay scales overlap, even for very Occupational pay scales overlap, even for very

different occupations.different occupations.

6.6. Women’s Shifting RoleWomen’s Shifting Role Women’s contribution or share of household income Women’s contribution or share of household income

depended on where they were in the parade.depended on where they were in the parade.

7.7. MinoritiesMinorities Overrepresented early on in the parade; strongly Overrepresented early on in the parade; strongly

represented in the middle; underrepresented toward represented in the middle; underrepresented toward the end of the parade.the end of the parade.

8.8. Income and the Class StructureIncome and the Class Structure The relationship between the distribution of income The relationship between the distribution of income

and the class structure is clear at the extremes but and the class structure is clear at the extremes but somewhat blurred in the middle.somewhat blurred in the middle.


The Distribution of IncomeThe Distribution of Income

The income gap between female- and The income gap between female- and couple-headed families is greater than couple-headed families is greater than between majority and minority families.between majority and minority families.– However, female-headed families are more However, female-headed families are more

prevalent among minority households.prevalent among minority households. Male-headed households have higher Male-headed households have higher

median incomes and are much less median incomes and are much less prevalent than female-headed ones.prevalent than female-headed ones.

One out of every six families is female-One out of every six families is female-headed.headed.





Sources of IncomeSources of Income Wages and salary provide most income Wages and salary provide most income

for most people.for most people. Households in the bottom 40% of the Households in the bottom 40% of the

income distribution receive a large share income distribution receive a large share of their income in the form of government of their income in the form of government transfer payments (e.g., Social Security, transfer payments (e.g., Social Security, veterans benefits, and public assistance).veterans benefits, and public assistance).

At successively higher levels, capitalist At successively higher levels, capitalist income (e.g., stock dividends, interest, income (e.g., stock dividends, interest, and rents) and business profits provide and rents) and business profits provide increasing proportions of total income.increasing proportions of total income.



Income SharesIncome Shares

The distribution of income is typically The distribution of income is typically analyzed in one of two formats:analyzed in one of two formats:

1.1. The distribution of households across ranges of The distribution of households across ranges of income. income.

Depicted pictorially in the income parade and Table 4.1.Depicted pictorially in the income parade and Table 4.1.

2.2. The distribution of income shares among The distribution of income shares among stratified segments of the population.stratified segments of the population.

Total income of all households as a national income pie.Total income of all households as a national income pie. Figure 4.3 reveals that the richest fifth of households is Figure 4.3 reveals that the richest fifth of households is

15 times that received by the poorest quintile.15 times that received by the poorest quintile.



Taxes and Tax TransfersTaxes and Tax TransfersThe Government as Robin The Government as Robin

Hood?Hood? The federal personal income tax is a The federal personal income tax is a

progressiveprogressive tax. tax. – In other words, people with higher incomes In other words, people with higher incomes

pay a greater proportion of their income to pay a greater proportion of their income to the IRS than do those with lower incomes.the IRS than do those with lower incomes.

There are also what are referred to as There are also what are referred to as regressiveregressive taxes (e.g., sales taxes). taxes (e.g., sales taxes).

– Regressive taxes take a higher proportion of Regressive taxes take a higher proportion of income at lower income levels. income at lower income levels.

– Low wage workers spend a higher Low wage workers spend a higher proportion of their incomes on consumer proportion of their incomes on consumer items and, therefore, lose a higher items and, therefore, lose a higher percentage of their incomes to regressive percentage of their incomes to regressive taxes like sales tax.taxes like sales tax.


Taxes and Tax Transfers Taxes and Tax Transfers The Government as Robin The Government as Robin

Hood, cont.Hood, cont. Government transfer payments and Government transfer payments and

noncash benefits increase the living noncash benefits increase the living standards of those families in the lowest standards of those families in the lowest income bracketincome bracket

However, the post-tax income However, the post-tax income distribution is largely indistinguishable distribution is largely indistinguishable from the pretax distribution.from the pretax distribution.

The richest fifth still claims almost half The richest fifth still claims almost half of all personal income.of all personal income.




How Many Poor?How Many Poor?

According to the federal government, in According to the federal government, in 2005 there were 37 million Americans living 2005 there were 37 million Americans living in poverty, about 13% of the population.in poverty, about 13% of the population.

However, the number of people considered However, the number of people considered to be in poverty depends on the definition to be in poverty depends on the definition that is used.that is used.

In chapter 10 we will consider different In chapter 10 we will consider different definitions of poverty in order that you may definitions of poverty in order that you may draw your own conclusions about what this draw your own conclusions about what this term means.term means.


Women and the DistributionWomen and the Distributionof Household Incomeof Household Income

Older women are often dependent on the Older women are often dependent on the pensions and/or Social Security benefits of pensions and/or Social Security benefits of their husbands.their husbands.

Since women outlive men, they are often put Since women outlive men, they are often put in the precarious position of losing these in the precarious position of losing these sources of income and using up their sources of income and using up their savings.savings.

According to the Census Bureau, 5% of According to the Census Bureau, 5% of cohabiting wives over the age of 65 are in cohabiting wives over the age of 65 are in poverty.poverty.

– However, 19% of similarly aged women living alone However, 19% of similarly aged women living alone are in poverty.are in poverty.


Women and the DistributionWomen and the Distributionof Household Income, cont.of Household Income, cont.

Divorce impacts women’s income Divorce impacts women’s income more adversely than it does men’s.more adversely than it does men’s.– This is partly a result of child care This is partly a result of child care

responsibilities, which tend to borne responsibilities, which tend to borne by women, as well as, the meager by women, as well as, the meager child support payments they receive.child support payments they receive.

Men actually increase their Men actually increase their economic situation after divorce economic situation after divorce whereas women tend to experience whereas women tend to experience a deterioration in their economic a deterioration in their economic situation.situation.


Women and the DistributionWomen and the Distributionof Household Income, cont.of Household Income, cont.

From 1960 to 2000, the labor force From 1960 to 2000, the labor force participation rate of women doubled.participation rate of women doubled.

As men’s wages have stagnated, As men’s wages have stagnated, women’s contributions to household women’s contributions to household incomes have become increasingly incomes have become increasingly critical in enabling families to either critical in enabling families to either stay afloat financially or maintain a stay afloat financially or maintain a middle or upper-middle class middle or upper-middle class standard of living.standard of living.



The Distribution of WealthThe Distribution of Wealth IncomeIncome is the inflow of money over a period of is the inflow of money over a period of

time (e.g., wages, interest, dividends); time (e.g., wages, interest, dividends); wealthwealth is is the value of assets held at a point in time (e.g., the value of assets held at a point in time (e.g., real estate, bank accounts, stocks, bonds).real estate, bank accounts, stocks, bonds).

– Wealth enables the maintenance of a particular Wealth enables the maintenance of a particular standard of living in the event of a sudden drop in standard of living in the event of a sudden drop in income.income.

– Most families do not have the type of wealth that Most families do not have the type of wealth that would enable them to endure the hardship of going would enable them to endure the hardship of going more than a month or two without income.more than a month or two without income.

– Wealth provides an important mechanism for the Wealth provides an important mechanism for the intergenerational transmission of inequality.intergenerational transmission of inequality.


The Distribution of Wealth, The Distribution of Wealth, cont.cont.

Upwardly mobile African Americans with above Upwardly mobile African Americans with above average incomes lag far behind white peers average incomes lag far behind white peers due to the effects of historical racial inequality.due to the effects of historical racial inequality.

Wealth is measured in two ways.Wealth is measured in two ways.– Gross assets Gross assets refers to the total value of assets refers to the total value of assets

someone owns.someone owns.– Net worth Net worth is a more realistic concept that refers to is a more realistic concept that refers to

the value of assets owned minus the amount of debt the value of assets owned minus the amount of debt owed.owed.

Most households derive the greater part of their Most households derive the greater part of their net worth from three asset types: home equity, net worth from three asset types: home equity, car equity, and bank deposits.car equity, and bank deposits.



There are three broad classes of wealth There are three broad classes of wealth holders:holders:1.1. The Near Propertyless ClassThe Near Propertyless Class

In 2007, about 35% of households had net worths In 2007, about 35% of households had net worths under $50,000.under $50,000.

Most net worths are under $25,000, while some have Most net worths are under $25,000, while some have negative net worths.negative net worths.

2.2. The “Nest Egg” ClassThe “Nest Egg” Class About 55% of households had net worths between About 55% of households had net worths between

$50,000 and $900,000.$50,000 and $900,000.

3.3. The Investor ClassThe Investor Class Just 10% of households had net worths greater than Just 10% of households had net worths greater than

$900,000.$900,000.



The concentration of wealth at the top The concentration of wealth at the top is so great that the top 1% now holds is so great that the top 1% now holds more net worth than the bottom 90%. more net worth than the bottom 90%. (This is shown in Table 4.7.)(This is shown in Table 4.7.)

Ownership of corporate stock and Ownership of corporate stock and mutual fund shares, bonds, investment mutual fund shares, bonds, investment real estate, and small business equity is real estate, and small business equity is almost entirely concentrated in the almost entirely concentrated in the hands of the top 10% of wealth holders.hands of the top 10% of wealth holders.





Trends in the Distribution of Trends in the Distribution of WealthWealth

The trend toward increasing inequality in The trend toward increasing inequality in the distribution of wealth was especially the distribution of wealth was especially notable in the 1980’s.notable in the 1980’s.

The wealth of the richest 1% has grown The wealth of the richest 1% has grown spectacularly since the mid-1970’s.spectacularly since the mid-1970’s.

At the same time that the wealthy have At the same time that the wealthy have become wealthier, more Americans have become wealthier, more Americans have become wealthy.become wealthy.

The number of millionaire households has The number of millionaire households has doubled in the decade following 1995.doubled in the decade following 1995.



Trends in the Distribution of Trends in the Distribution of Wealth, cont.Wealth, cont.

Gilbert identifies four factors that are Gilbert identifies four factors that are important in accounting for the large increases important in accounting for the large increases in the number of wealthy families and the in the number of wealthy families and the concentration of wealth:concentration of wealth:

1.1. The rapid growth of incomes at the top of the The rapid growth of incomes at the top of the distribution.distribution.

2.2. The fortunes that have been made in the new The fortunes that have been made in the new information technology and other high-growth information technology and other high-growth sectors of the economy.sectors of the economy.

3.3. Declining tax rates for the top income bracket.Declining tax rates for the top income bracket.

4.4. The rise in the stock market since the early 1980s.The rise in the stock market since the early 1980s.


Trends in the Distribution of Trends in the Distribution of IncomeIncome

By the year 2000, the ratio between the By the year 2000, the ratio between the incomes of the bottom 40% and the top incomes of the bottom 40% and the top 5% was the highest ever measured in 50 5% was the highest ever measured in 50 years of government income surveys.years of government income surveys.

During the Age of Shared Prosperity (1945 During the Age of Shared Prosperity (1945 to early 1970’s) income growth was to early 1970’s) income growth was generally higher and more broadly shared.generally higher and more broadly shared.

During the Age of Growing Inequality (mid During the Age of Growing Inequality (mid 1970s +) income growth was fastest at top 1970s +) income growth was fastest at top of the income distribution.of the income distribution.





Income DynamicsIncome Dynamics

There are few studies documenting the way in There are few studies documenting the way in which individuals move up or down the income which individuals move up or down the income distribution over time. distribution over time.

– These types of studies are both difficult and expensive These types of studies are both difficult and expensive to conduct.to conduct.

– The few existing studies have shown that individuals do The few existing studies have shown that individuals do tend to increase their incomes over their careers as they tend to increase their incomes over their careers as they gain experience and successive promotions.gain experience and successive promotions.

– They have also revealed a slowing of income mobility They have also revealed a slowing of income mobility with fewer families moving up or down but remaining with fewer families moving up or down but remaining closer to where they were 10 years prior.closer to where they were 10 years prior.

Finally, the tendency for families to move from either Finally, the tendency for families to move from either extreme of the income distribution in the course of a extreme of the income distribution in the course of a decade is quite rare.decade is quite rare.



Changing Federal Tax RatesChanging Federal Tax Rates

Effective tax rates have fluctuated over the Effective tax rates have fluctuated over the years.years.– The nature of changes in the tax code are largely The nature of changes in the tax code are largely

a function of whether there is a Republican or a function of whether there is a Republican or Democratic administration in office.Democratic administration in office.

Despite tax changes that have benefited Despite tax changes that have benefited those at differing positions in the income and those at differing positions in the income and wealth distribution, the overall result has wealth distribution, the overall result has been that those at the highest point in the been that those at the highest point in the income distribution have seen their effective income distribution have seen their effective tax rates decline most from 1979-2004.tax rates decline most from 1979-2004.


Chapter 4 Wealth and Income. © Pine Forge Press, an Imprint of SAGE Publications, Inc., 2011.

Documents

income slide

distribution of income

income distribution

capitalist income

income gap

ranges of income

sources of income jobs

sources of income wages