Issues 2012: Income inequality in the U.S. - WTOC-TV: Savannah, Beaufort, SC, News, Weather & Sports

Issues 2012: Income inequality in the U.S.

The graph shows the difference in after-tax income by income percentages from 1979-2007. (Source: Congressional Budget Office) The graph shows the difference in after-tax income by income percentages from 1979-2007. (Source: Congressional Budget Office)
The wealth gap has reached a level not seen since the 1920s in the U.S. The wealth gap has reached a level not seen since the 1920s in the U.S.

Editor's note: This is the third in a series examining the issues that will play a significant part in the 2012 presidential election. Periodically, we will take a closer look at these issues and present them in a way that will help you make an informed decision in November.

Click here to read the first two installments.

(RNN) – The wealth gap in the U.S. is the greatest it has been since the 1920s.

There are nearly 309,000,000 people in the United States, according to the 2010 Census. And the total wealth of the top 400 is more than the bottom 185,400,000 combined.

The top 1 percent of the population control 40 percent of the wealth. The top 1 percent saw their incomes rise 275 percent between 1979-2007.

Nearly 95,000 millionaires – about 25 percent of them – have a lower tax rate than 10.4 million moderate-income taxpayers who make less than $100,000 annually.

Last year, the Occupy movement began in response to what its supporters viewed as a skewed playing field in favor of "The One Percent" and large corporations.

But debate remains about who belongs to this elite class.

Who is ‘The One Percent?'

Is the group made up of the top 1 percent in income or the top 1 percent in wealth? The two are not mutually exclusive.

The threshold for the top 1 percent in wage earners is around $380,000 per year, according to The New York Times. That figure is roughly 7.5 times the U.S. median household income.

Compare that to the 1 percent threshold for net worth: nearly $8.4 million. That is 69 times more than the median household's holdings.

Editorials countering the Occupy view are quick to point out the top percentage point wage earners don't make that much, and they pay a higher tax rate than middle income earners.

And among those who make the bulk of their money from wages, they are correct. With the progressive federal tax laws in place (the more you make, the higher your tax bracket is), they pay a larger percentage.

But while all wages are earnings, not all earnings are made from wages.

Evidence shows the decreased tax rate on capital gains, dividends and other sources of income is a significant factor in the gap increase during the last decade.

[RELATED: Capital gains taxes lowest since WWII]

The effect of the Bush tax cuts

Many have been able to take advantage of tax code changes, commonly referred to as the Bush tax cuts, since they started to take effect in 2001.

But some aspects of the legislation passed under President George W. Bush aided the very rich in particular, causing a spike in income inequality.

The changes lowered the rate on capital gains taxes – the sale of stocks, bonds, real estate or other property – from 20 percent to 15.

Taxes on qualified dividends, or payments made to shareholders of a company, were lowered from someone's regular tax rate (up to 39.6 percent) to 15 percent.

Forbes reported in 2011 that the top 0.1 percent of the U.S. population was making half of all capital gains. Furthermore, capital gains made up 60 percent of the earnings by the wealthiest 400 people.

Wage increases and job growth

While the top 1 percent saw a 275 percent growth in their incomes between 1979 and 2007 (accounting for inflation), the next 19 percent saw a 65 percent increase.

Households in the 20 to 80 percentiles got a 40 percent increase and the bottom 20 got an 18 percent raise.

Much of that growth at the top, about 170 of the 275, began after 2002. It had dropped for two years during the recession and losses in the stock market (see graph) in the two prior years.

The October 2011 study used the most recent data available at the time. Economists expect the percentage of growth to decrease in the years since 2007, because of the recession.

Bush promoted the tax legislation as an engine to spur job creation. In October 2007, the White House stated 8.31 million jobs had been created in the previous 50 months.

In response, the liberal-leaning Center on Budget and Policy Priorities termed the growth "weaker than average" when compared to previous economic expansions.

The majority of the growth, around 7.9 million jobs, was lost during the recession before the market began to rebound.

What are the candidates saying?

Politicians from both major parties have inferred or outright accused their opponents of promoting "class warfare" through proposed policy in recent years. The ongoing presidential campaign has been no different.

President Barack Obama called it unfair that a person earning $1 million or more per year has a lower tax rate than someone who makes less than one-tenth that amount. And he has consistently called for Congress to allow the Bush tax cuts to expire for high-income households.

Obama said income inequality "gives an outsized voice to the few who can afford high-priced lobbyists and unlimited campaign contributions" at a speech in December.

"We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by," he said in the State of the Union address Jan. 24, "or we can restore an economy where everyone gets a fair shot, and everyone does their fair share and everyone plays by the same set of rules."

Republican primary frontrunner Mitt Romney posted his plan for cutting taxes on his campaign site. The former Massachusetts governor proposed making across the board cuts on taxes, maintaining rates on capital gains, dividends and interest; and repeal the alternative minimum tax.

But Romney also said the one percenters would keep paying their current share or more.

"To repair the nation's tax code, marginal rates must be brought down to stimulate entrepreneurship, job creation and investment, while still raising the revenue needed to fund a smaller, smarter, simpler government," according to the plan on his site.

CNN reported Romney believed the focus on income inequality was about "envy."

Romney's main Republican opponent, Rick Santorum, said he believed in "equality of opportunity" but there would always be income inequality and he supported it.

However in a 2002 article, Santorum wrote "the growing disparity between the rich and poor is one of the critical social dilemmas we face in the 21st century."

"I believe that the growing wealth gap is one of the key reasons for this increasing disparity," the former Pennsylvania senator stated.

Despite the clashing statements, his views then and now appear similar. In 2002, he wrote the answer lied in "strengthening the asset base" of people without restraining those in the top percentile.

His "Santorum Solution" posted on his campaign website includes several tax cuts for all income brackets. Cutting the capital gains and dividends rates to 12 percent, eliminating the alternative minimum tax and cutting down to two income tax rates – 10 and 28 percent – are among the proposals.

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