STAGGERING INCOME INCREASE FOR TOP 1 PERCENT EXAMINED

Oct 27th, 2011 | By Sharon Shaw Elrod MSW EdD | Category: Senior Finances

Income Increases Dramatically for Top 1 Percent

The Congressional Budget Office (CBO) released a report recently showing how and why income rose so dramatically for the top 1 percent over the past 28 years.  The CBO is a nonpartisan office that provides research for Congress, based on requests.  This report was requested by Senators Charles Grassley and Max Baucus and describes the staggering increase in income for the top 1 percent of people in the United States, the wealthiest of the wealthy.



The report describes what happened in defined income groups over 28 years, from 1979 to 2007:

  • For the 1 percent of the population with the highest income, average real after-tax household income grew by 275 percent between 1979 and 2007.
  • For others in the 20 percent of the population with the highest income (those in the 81st through 99th percentiles), average real after-tax household income grew by 65 percent over that period, much faster than it did for the remaining 80 percent of the population, but not nearly as fast as for the top 1 percent.
  • For the 60 percent of the population in the middle of the income scale (the 21st through 80th percentiles), the growth in average real after-tax household income was just under 40 percent.
  • For the 20 percent of the population with the lowest income, average real after-tax household income was about 18 percent higher in 2007 than it had been in 1979.  (CBO Report, October 2011)

Some Reasons Why

Why did the one percent do so well? The CBO suggests they get paid a lot more than they used to (salary and bonuses); this explains the largest chunk of the income increase.  They also make a lot of money on investments and business profits.

But the subsequent question becomes, why have salaries and bonuses increased so much for the top 1 percent… 275 percent?  The Jacob Goldstein, NPR Reporter, suggests there are three possible answers:
  1. Companies have grown larger and more complex. So a single executive can have a bigger impact on profits. Therefore, it’s rational for companies to pay executives a lot more.
  2. A shift toward paying execs with stock options means that the value of their pay packages can shoot way up when the stock market rises.
  3. ‘Weaknesses in corporate governance have enabled corporate executives to overpay themselves. In other words, it’s not rational for companies to pay executives so much.”  (Jacob Goldstein, NPR, Planet Money)

Both the CBO report and Goldstein’s articles are good reads.  We suggest readers study them carefully to be armed with facts when politicians offer opinions suggesting the wealthiest Americans need to be protected from taxes.

 



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