Income Inequality Grew Steadily from 2002-07

The top one percent of wealthiest households in the U.S. saw almost unprecedented income growth between 2002 and 2007, with income rising ten times faster than it did for the bottom 90 percent of households. As a group, the richest one percent of households saw their incomes grow by 62 percent during this period, after adjusting for inflation. By comparison, the bottom 90 percent of Americans (those with annual incomes below $110,000) experienced income growth of only four percent.

According to a new analysis of IRS data by economists Thomas Piketty and Emmanuel Saez (summarized by CBPP), income growth skewed in favor of the wealthy during the 1920’s, but then turned towards the middle class during the post-WWII era. As the graph below shows, in the early 1980’s income growth again began to concentrate in the upper tiers of American households.



Income gains have been even more pronounced among those at the very top of the income scale. The CBPP report shows that incomes in the top one-tenth of one percent of U.S. households grew by about 94 percent ($3.5 million per household) from 2002 to 2007.

The report does not show the impact of the current economic recession. Even though it is expected that income concentration will fall in 2008-09, once the recovery begins economists predict income inequality trends will continue.

Does the AWB Want an Income Tax?

Don Brunell frequently argues on his blog that state business taxes are too high. (As president of the Association of Washington Business (AWB), it's part of his job.) His recent blog post used a new study from the Council of State Taxation (COST) to emphasize his point about business taxation.

In the study, Washington State is ranked 12th among the 50 states by the share of state and local taxes that are paid by businesses. We noticed a commonality among the top-ranked states: most have little or no income tax.

The table below shows the 17 states that rank in the top third. Thirteen (including Washington State) have no personal income tax or a low personal income tax. If we had a personal income tax, we'd probably be lower on the list. The remaining four states either have no general sales tax or a relatively low reliance on property taxes.


Here's some more to chew on: Studies that measure the share of taxes paid by businesses versus individuals can be misleading because they don’t fully account for who actually pays the tax in the end.

In Washington State, this is particularly true because of our reliance on the business and occupation tax (the B&O) rather than a corporate income tax. Businesses are more able to pass the cost of the B&O to consumers. And since the tax is levied regardless of the business’s ability to pay, it falls disproportionately on individual small business owners.

Bottom line? Studies like the one cited on the AWB blog are hardly conclusive evidence that Washington State’s business taxes are too high. We need a more comprehensive conversation about how to improve our tax structure in ways that benefit all Washingtonians.