America's Income Chasm:
Nearly a New Record

In just a quarter century, a new analysis of IRS data makes clear, the gap between families at the tippy-top of the U.S. economic ladder and nearly everybody else has more than quadrupled.

April 2 , 2007

By Sam Pizzigati

“Income inequality,” President George W. Bush acknowledged for the first time this past January, “is real.”

Last week, two indefatigable young economists — the 34-year-old Emmanuel Saez from Berkeley and the 35-year-old Thomas Piketty from the Paris School of Economics — revealed just how real.

The gap between the incomes of America’s very richest and average Americans, new data from Saez and Piketty document, now stretches almost as wide as the widest gap on the modern American historical record.

Back in 1928, the last full year before the Great Depression began, the families that made up America’s most affluent top hundredth of 1 percent — the richest of the rich — pocketed incomes that averaged $8.2 million, as measured in dollars inflation-adjusted to 2005 levels.

Having trouble contemplating the concept of top hundredth of 1 percent? Think about it this way. In a society of 10,000 families, the top hundredth of 1 percent would consist of a single family.

In the United States of 1928, this top hundredth of 1 percent amounted to nearly 5,000 families. These fortunate few at America’s economic summit averaged 891 times more income than families in the bottom 90 percent averaged.

By 1955, after a tumultuous quarter century of depression and war, families in the top hundredth of 1 percent took home only $3.8 million, in inflation-adjusted dollars. These mid 20th century affluents made just 179 times the average bottom 90 percent income.

That share didn’t change much over the next 25 years. In 1980, the richest of the rich took home 175 times more than Americans in the bottom 90 percent.

And today? The new Saez-Piketty figures for 2005, the most recent year with IRS data available, show that our contemporary top hundredth of 1 percent are averaging $25.7 million in income, 882 times more than the bottom 90 percent average — a gap that’s almost identical to the 891-to-1 divide back in the bad old days of 1928.

The 2005 gap, notes Berkeley’s Saez, may actually be wider than the 1928 gap, for two reasons. The figures Saez and Piketty released last week reflect preliminary IRS data for 2005. The final IRS data won’t appear until next September, and these will likely show an even greater top-heavy distribution of income than the preliminary figures, since high-income Americans tend to file their tax returns later than the less financially favored.

The second reason the Saez-Piketty data understate the dollars cascading into affluent pockets: Rich people do a more effective job concealing income from the IRS than average-income Americans.

The IRS successfully tracks 99 percent of all wage, salary, and pension data earned in the United States every year, but “only about 70 percent of business and investment income,” as Pulitzer Prize-winning journalist David Cay Johnston noted last week in his analysis of the new Saez-Piketty data

Business and investment income flows disproportionately to high-income Americans. Average Americans get the vast majority of their income from wages, salaries, and pensions. The families in the richest tenth of 1 percent get nearly two-thirds of their annual earnings from sources other than wages, salaries, and pensions.

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Sam Pizzigati edits Too Much, the online weekly on excess and inequality.