The Gap that Gave Us the Great Depression

            I have seen this nifty chart – or versions of it – in a few blogs and one print magazine.  It’s actually two nifty charts.  The top chart tracks the average income of the super-rich (the top .01 percent of US families) and compares it to the average income of the bottom 90 percent of families from 1917 to 2006.  The second largest gap – where the highest average was 892 times the lowest average – was in the year before the start of the Great Depression, 1928.  The time of least income inequity was approximately from 1970 to 1978 when the multiple was “only” somewhere slightly less than 200.  But that yawning gap, at a breathtaking 976 times difference between the rich and the bottom 90 percent, returned with a vengeance by 2006 – two years before the start of the Great Recession.  The implication is clear enough: not only is the gap between the richest and almost everybody else inequitable, it is a source of instability in the economy.  The super-rich are that way at our peril and expense.

            The bottom half of the chart tracks income tax rates on top earners over the same period.  The charts are negatively correlated; they move in opposite directions.  The chart annotations say the relationship is deliberate and causal: “High taxes on the rich, in the mid-20^th century, helped keep income from concentrating at America’s economic summit.”  The highest marginal rate was in 1944 at 94%.  It’s currently at 35% ... for regular income, not capital gains.  At that marginal rate, the wealthiest would pay approximately 23% of their income in taxes.  If most of your income is from capital gains, your effective rate is closer to 15%.