US Income Gap Close to 1928 Levels in 2005

A preliminary analysis of 2005 IRS data by two economics professors is reported by David Cay Johnston in the New York Times Business section Thursday. Prof. Emmanuel Saez, UC, Berkeley and Prof. Thomas Piketty of the Paris School of Economics, consider the growing disparities in American income “significant in terms of social and political stability.”

Income inequality grew significantly in 2005, with the top 1 percent of Americans — those with incomes that year of more than $348,000 — receiving their largest share of national income since 1928, analysis of newly released tax data shows.

-The top 10 percent, roughly those earning more than $100,000, also reached a level of income share not seen since before the Depression

-While total reported income in the United States increased almost 9 percent in 2005, … average incomes for those in the bottom 90 percent dipped slightly compared with the year before, dropping $172, or 0.6 percent.

-The gains went largely to the top 1 percent, whose incomes rose to an average of more than $1.1 million each, an increase of more than $139,000, or about 14 percent.

-The new data also shows that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Per person, the top group received 440 times as much as the average person in the bottom half earned, nearly doubling the gap from 1980.

So much for the trickle down hypothesis. It gets worse.

[Professor Saez] noted that the analysis was based on preliminary data and that the highest-income Americans were more likely than others to file their returns late, so his data might understate the growth in inequality.

The disparities may be even greater for another reason. The Internal Revenue Service estimates that it is able to accurately tax 99 percent of wage income but that it captures only about 70 percent of business and investment income, most of which flows to upper-income individuals, because not everybody accurately reports such figures.

The comparison to the roaring twenties figures:

The analysis by the two professors showed that the top 10 percent of Americans collected 48.5 percent of all reported income in 2005.

That is an increase of more than 2 percentage points over the previous year and up from roughly 33 percent in the late 1970s. The peak for this group was 49.3 percent in 1928.

Others have chimed in to interpret the data.

Robert Greenstein, executive director of the Center on Budget and Policy Priorities, an advocacy group for the poor, said that the data understates the widening disparity between the top 1 percent and the rest of the country.

He said that in addition to rising incomes and reduced taxes, the equation should take into account cuts in fringe benefits to workers and in government services that middle-class and poor Americans rely on more than the affluent. These include health care, child care and education spending.

Those cuts in the fringe benefits are despite the facts of business profits.

The top tenth of a percent and top one-hundredth of a percent recorded even bigger gains in 2005 over the previous year. Their incomes soared by about a fifth in one year, largely because of the rising stock market and increased business profits.

The profits being aided and abetted by Government subsidies and tax cuts? Speaking of tax cuts. Greenstein has more to add to the picture.

Mr. Greenstein’s organization will release a report today showing that for Americans in the middle, the share of income taken by federal taxes has been essentially unchanged across four decades. By comparison, it has fallen by half for those at the very top of the income ladder.

Because the incomes of those at the top have grown so much more than those below them, their share of total income tax revenue has risen despite the reduced rates.

So for much of America, our income has not risen, our share of the tax burden has remained the same. The rich have enormously increased their income, their taxes have been cut in half because their share of the tax burden has increased. And now, for the bonus round.

A major issue likely to be debated in Congress in the year ahead is whether reversing the Bush tax cuts would slow investment and, if so, how much that would cost the economy.

Would anyone else bet the possibility of slowing investments will take precedence over slowing the deficit, debt and the widening gap in American incomes?

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11 Responses to US Income Gap Close to 1928 Levels in 2005

  1. Ralph Brauer says:

    You might be interested in taking a look at the book I wrote that discusses this issue as part of a larger pattern. The book is The Strange Death of Liberal America. Information about it can be found at the website:

  2. Darrell Prows says:

    Interestingly, the House just passed a budget proposal for fiscal 2008 and beyond that brings the budget back into the black in 2012 by not extending the Bush tax cuts. I had patience with every transgression of Slick Willie simply because he did manage to pay down the federal deficit for several years. Typically one does not associate Democrats with exemplary fiscal responsibility, but that just goes to show what kind of a country we’ve become.

  3. Darrell

    Clinton was a fiscal conservative actually who managed to leave BushCo a huge kitty to play with. BushCo put us in the red. The economy always fares better under Democrats.

  4. Ginny Cotts says:

    Dr Brauer,

    Thanks for the pitch. Looks excellent. I have a quote from The Once and Future King T.H. White, that guides my book choices.

    “The best thing for being sad,” replied Merlin “is to learn something.
    That is the only thing that never fails. You may grow old and trembling in your anatomies. You may lie awake at night listening to the disorder of your veins. You may miss your only love. You may see the world around you devastated by evil lunatics, or know your honor is trampled in the sewers of baser minds.

    There is only one thing for it then, to learn.

    Learn why the world wags and what wags it.

    That is the only thing the mind can never exhaust, never alienate, never be tortured by, never fear or distrust, and never dream of regretting.

    Learning is the thing for you.”

    I turn that around a bit to the idea that learning is the universal human joy that equals love. I love to find the books that will give me a better understanding of why the world wags, what wags it and WHO.

    At this point in time we have an overwhelming number of books that are contributing to the understanding of world wagging. Somehow, I have to learn to read faster!

  5. Nick says:


    SUre a lower budget deficit is a good thing-provided it’s done correctly. I’m not saying Clinton didn’t do some things right when it came to balancing the budget, but don’t forget that growing income inequality played a big part in hte reduction of the deficit under Clinton-and is playing a big part in the reduction of the deficit the last couple years as well

    See the article Thanks, Rich People for more,9171,1597548,00.html?xid=rss-business

  6. Nick

    The little people are paying more taxes under Bush.

  7. battlebob says:

    I don’t want to dump on anyone’s parade but is it possible for the income gap to grow because more jobs are being created at lower wages vs. the wages of current jobs?

    In other words, the income gap may not have as much meaning as the avereage and mean values of income packages; salary, benefits, taxes, etc.
    I would guess the value of income packages for new jobs is decreasing which may be more significant.

    The various percentiles may have more of a meaning.

    If I get time or hopefully Nick may take a look at this..

  8. Battlebob

    That makes sense to me. By the way, we’ve missed you around here…

  9. Darrell Prows says:

    Can a modern society survive without reaching a balance in the division of prosperity between capital and labor? Conservatives worship money, capital. The Republican Party, then, can rightly be viewed as a greed magnate. Liberals value people over mere things. Given that labor equates to people, I’ve given a lot of thought to trying to understand why the left doesn’t win every election. With the numbers cited here, though, the social contract has been violated to a degree that it seems like things have to go in the other direction for awhile. With investors reaping windfalls, their gains come partially from our middle class and people will become motivated to ensure that they start getting their fair share again.

    Another problem that I worry about is that much of the rest of the current windfall comes from people too poor and too far away to have any realistic recourse. The world economy is too integrated for us to ignore the fact that our standard of living comes, in part at least, at the expense of folks who are far less well off then we are. The ten, twenty, maybe even thirty per cent of the world population that is at the very bottom of the economic scale live a variety of poverty that is very little changed since 1928. Whatever has happened on a relative basis in our country one would be hard pressed to come up with any portion of our society that is not better off than was the case in 1928.

    Look at how much of human history consists of telling stories of events that have resulted from income inequality. When do the people in this country look at ourselves and decide that we have gotten far enough ahead that there is a true danger of our leaving behind billions who have every reason to hope that we will not act like we’re all Republicans.

  10. Ginny Cotts says:


    Although I would agree that too many of the jobs created in the last 6 to 10 years are lower pay than the kinds of jobs we used to see (a significant issue in the rust belt and for union jobs generally), I am not sure how that really makes a difference in interpreting the gap.

    As you say, the salary and benefits values are decreasing, especially in the number that have no health care. That alone makes a huge difference. Last year I applied for a job that had reasonable health care and a very good salary. No company IRA or anything.

    I would love it if Nick or you can probe this a bit more. I do think the further number crunching is simply going to enlarge the problem. Especially if we include debt.

  11. Ginny Cotts says:


    I have been referring to Jared Diamond’s Collapse a lot recently, having just finished it with a lot more hope than I have had for awhile. Diamond looks at the many issues that have caused societies to fail or collapse. Ecological reasons are present in all – deforestation, overhunting or fishiing- plus the inability of the wealthy to change their consumption and rivalry for more wealth or items of wealth. As Diamond puts it, they simply secure for themselves and their children of the position to be the last to starve to death.

    Although the world is far more interconnected, those problems could still come to our table because of the degree to which all Americans overconsume and the possibility that other countries may not choose to help us when they are even worse off. There will be plenty of those billions who will see us as having enough to share and if they are desperate enough, coming here illegally to get what they can to survive.

    We can also take heart in the growing awareness of other countries to develop their economies and turn around the ecological damage that threatens them. We still need to get back in the International community to be a part of the change.