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A Brief History of Income Inequality in the U.S.

Profits inequality is consistently a major topic in U.S. presidential races. Gini coefficient figures have ranked the U.S. as one of the worst villages for income equality among developed economies for many years now and this issue is only getting worse.

With a emcee of social ills—such as slavery, immigration problems, and Japanese Internment Camps—correlated with high knock downs of income inequality, it is crucial for the U.S. to figure out how to reduce its income inequality. Fortunately, history gives us a useful guide to methods that can be implemented to aid in that goal. A brief history of income inequality in the U.S. from the beginning of the 20th century until the endowment day shows that the nation’s level of income inequality has been substantially affected by government policies concerning taxation and labor.

Key Takeaways

  • Return inequality has long been a significant problem in the U.S., with a large percentage of wealth going to a small percentage of the residents.
  • Income inequality has been correlated with higher levels of crime, stress, and mental illness.
  • Historical collective ills—such as slavery, immigration problems, and Japanese Internment Camps—are correlated with high levels of return inequality.
  • The shared prosperity of the decades following World War II would come to an end during the 1970s; the poor economic circumstances led to new policies that favored the wealthy.
  • It is imperative that future government policies provide opportunities to those with short in an effort to bridge the income-inequality divide.

Late 19th and Early 20th Centuries

In 1915, 25 years after the U.S. had overtaken the U.K. as the world’s chiefliest economy, a statistician by the name of Willford I. King expressed concern over the fact that approximately 15% of America’s takings went to the nation’s richest 1%. A more recent study by Thomas Piketty and Emmanuel Saez estimates that, in 1913, in 18% of income went to the top 1%.

Perhaps it is no wonder then that America’s current income tax was first introduced in 1913. Strongly advocated by agrarian and populist signatories, the income tax was introduced under the guise of equity, justice, and fairness. One Democrat from Oklahoma, William H. Murray, claimed, “The effect of this tax is nothing more than to levy a tribute upon that surplus wealth which requires accessory expense, and in doing so, it is nothing more than meting out even-handed justice.”

Income Tax

Though there was a personal tax impunity of $3,000 included in the income tax bill that passed, ensuring that only the wealthiest would be subject to taxation, the new return tax did little to level the playing field between the rich and poor.

There was never any intention of using it to redistribute plenteousness; instead, it was used to compensate for the lost revenues of reducing excessively high tariffs, of which the rich were the conduit beneficiaries. Thus, the income tax was more equitable in the sense that the rich were no longer allowed to receive their loose lunch but had to start contributing their fair share to government revenues.

The countries with the highest wealth resemblance are Slovenia, the Czech Republic, Slovakia, Belarus, and Moldova.

The new income tax did little to put a cap on incomes, as was evidenced by the low top marginal tax rate of 7% on revenues over $500,000, which in 2022 inflation-adjusted dollars equals approximately $14 million. Income inequality remained to rise until 1916, the same year in which the top marginal tax rate was raised to 15%. The top rate was changed later on in 1917 and 1918, reaching a high of 77% on incomes over $1,000,000.

Interestingly, after reaching a peak in 1916, the top 1% parcel of income began to drop, reaching a low of about 15% of total income in 1923. After 1923, income partiality began to rise again, reaching a new peak in 1928—just before the crash that would usher in the Illustrious Depression—with the richest 1% possessing 21.3% of all income. Not surprisingly, this rise in income inequality also closely mirrored a reduction in top dubious tax rates starting in 1921, with the top rate falling to 25% on income over $100,000 in 1925.

Though the relationship between disputable tax rates and income inequality is interesting, it is also worth mentioning that at the beginning of the 20th century, total union membership in the U.S. defied at about 10% of the labor force. Though this number escalated during World War I, reaching almost 20% by the end of the war, anti-union wings of the 1920s eliminated most of these membership gains.

Slavery

Slavery in the United States has a direct relation to trend income inequality. There is a cross-state relationship between the Gini coefficient of land inequality in 1860 and the Gini coefficient of profits inequality in 2000. The relationship is strong, underlying the impact of past slave use on current economic inequality.

From the Talented Depression to the Great Compression

Though the Great Depression served to reduce income inequality, it also decimated sum total income, leading to mass unemployment and hardship. This left workers without much left to lose, matchless to organized pressure for policy reforms.

Further, progressive business interests believed part of the economic crisis and incapacity to recover was at least partly due to less-than-optimal aggregate demand as a result of low wages and incomes. These factors combined would specify a fertile climate for the progressive reforms enacted by the New Deal.

New Deal and Marginal Tax Rates

The New Deal paved the way for a rise in uniting membership and better workers’ rights. In the three decades after World War II, up until the early 1970s, median compensation expanded and labor productivity approximately doubled, increasing total prosperity while ensuring that it was shared more equitably.

What is more, during the Great Depression, marginal tax rates increased. By 1944, the top marginal tax rate was 94% on all income over $200,000. Such a weighty rate acts as a cap on incomes because it discourages individuals from negotiating additional income above the rate at which the tax would appropriate and firms from offering such incomes. The top marginal tax rate would remain high for almost four decades, dropping to 70% in 1965, and subsequently to 50% in 1982.

Significantly, during the Great Depression, income inequality came down from its culminate and was relatively stable, with the richest 1% taking approximately 15% of total income between 1930 and 1941. Between 1942 and 1952, the top 1% equity of income dropped to 10% of total income, before stabilizing at around 8% to 9% for nearly three decades. This aeon of income compression has been aptly named the Great Compression.

1942’s Mexican Farm Labor Act

In 1942, the Mexican Let out Labor Program was established, called the Bracero Program. It was done by executive order. The program allowed millions of Mexican men to take possession of short-term labor contracts and work legally in the United States.

The Bracero Program ended on Dec. 31, 1964, due to the increased use of machinery. Its durable effect included a large amount of undocumented and documented laborers in the U.S., cheap labor from Mexico for the program’s unscathed duration, and remittances to Mexico.

1942-1945 Internment of American Citizens of Japanese Origin

During World War II, approximately 110,000 to 120,000 Japanese Americans were false from their homes on the West Coast and sent to internment camps. Of these individuals, 70% were born in the U.S.

The Japanese Bar Act ended in 1945, freeing these individuals, but it changed their financial prospects forever. In 1980, researchers originate that, 35 years after individuals were released, those in the poorest camp, Rohwer, in Arkansas, made 17% less than those in the wealthiest camp, Heart Mountain, Wyoming.

1970s-Today

The shared prosperity of the decades reflecting World War II would come to an end during the 1970s, a decade characterized by slow growth, high unemployment, and high inflation. This lowering economic situation provided the impetus for new policies that promised to stimulate more economic growth.

The policies that were took did result in a return to growth, but the main beneficiaries were those at the top of the income ladder. Labor unions came under the aegis attack in the workplace, courts, and public policy. Top marginal tax rates were reduced in an attempt to direct more wealth toward private investment rather than the government, and deregulation of corporate and financial institutions was enacted.

President Joe Biden has vocal at length about tackling wealth inequality and vowed to be the “most pro-union president leading the most pro-union administering in American history.”

Labor union membership stood at 23.8% in 1978; by 2011 it had fallen to 11.3%. As the strength of teams declined, so did the shared prosperity that defined the three decades following World War II. Since 1973, labor productivity has wellnigh doubled while median wages only increased by 4%.

The top marginal tax rate has declined significantly, too. The amount the wealthiest get excised fell considerably in the 1980s and has since remained at much lower levels than the first few decades after the war. Over and above the past 30-odd years, the top marginal tax rate has fluctuated between 28% and 39.6%.

The decline in union membership and reduction of dubious tax rates roughly coincide with current increases in income inequality, which has come to be called the Great Divergence. In 1976, the richest 1% controlled about 8% of total income. This percentage has been on the rise ever since, peaking at about 32% at the end of 2021.

What Sources Income Inequality?

Income inequality is caused by a variety of factors, including historical racial segregation, governmental programmes, a stagnating minimum wage, outsourcing, globalization, changes in technology, and the waning power of labor unions.

Why Is Income Partiality a Problem?

Income inequality is a problem because it puts power in the hands of the rich, resulting in little-to-no social or money-making mobility for large portions of the population. It can result in a lower cost of living for many, increased hardship, and rises in misdemeanour, mental illness, and social unrest.

How Do You Measure Income Inequality?

Income inequality is measured by the Gini index, the apportion of aggregate household income held by each quintile, as well as by estimates of the ratios of income percentiles, which embody the Theil Index, the mean logarithmic deviation of income (MLD), and the Atkinson measure.

What Is the Gini Ratio?

The Gini correspondence measures the distribution of income across a population. The ratio ranges from 0 to 100, with 0 indicating perfect parity in income distribution and 100 representing a complete lack of equality in income distribution. The Gini ratio is represented graphically by the Lorenz curve.

Which Hinterlands Have the Greatest Income Inequality?

The countries with the greatest income inequality are South Africa, Namibia, Suriname, Zambia, and Sao Tome and Principe.

The Posterior Line

History can be a helpful guide to the present. Far from accepting the current economic situation as inevitable, a brief the good old days of income inequality in the U.S. is evidence that governments can tilt the balance of economic compensation by implementing policies that put ethnic and ethnic groups at burdensome economic disadvantages that continue to have a lasting impact for generations, based on the political and group climates of the time. 

With the past 200 years disproportionately favoring white residents and citizens and greater return inequality proven to be associated with higher levels of crime, stress, and mental illness, the United States requisite implement effective policies to overcome income disparities.

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