Why the Gap Between Rich & Poor Is Widening

An Inside Look at Why the Rich Get Richer & the Poor Stay Put

Why the Rich Get Richer & the Poor Struggle

Numbers released by the U.S. Census Bureau earlier this month confirm what many have known for a long time: The gap between the rich and the poor in this country is growing ever wider. And while we examined the numbers behind the income gap last week, we heard your requests for an actual explanation of why it exists loud and clear.

So while the numbers don’t tell us why income inequality continues to climb, the experts will.

Technology — The Double-Edged Sword

Just as technology has worked its way into our daily work lives, it has also had a significant big-picture effect on employment, according to a March 2012 report from the nonpartisan Congressional Research Service.

On the bottom end of the income scale, technology now performs some of the functions that once went to low-skill workers. Furthermore, technological changes — like improved computer and telecommunications systems — have enabled more U.S. companies to send jobs to countries with lower labor costs. With more workers competing for fewer jobs, wages for low-skill occupations dropped.

At the same time, technology has been a boon for some higher earners. In fields such as engineering and law, technology “serves as a complement to high-skilled workers, which has raised demand for and the relative wages of these workers,” the report concludes.

Current Tax Rates Favor the Rich

Then there’s the current tax rate structure, according to a separate, recently released analysis by the Congressional Research Service. The average federal income tax rate for the highest-income taxpayers has been falling steadily for the past 60 years, according to the report. Most recently, the so-called Bush tax cuts enacted in 2001 and 2003 lowered the top marginal tax rate from 36.9 percent to 35 percent.

The natural effect of lower tax rates is that the wealthiest get to keep more of their income, which tends to widen the gap between rich and poor, according to the CRS analysis. Lower tax rates, the report suggests, may also act as an incentive for top earners to negotiate even higher compensation; the lower the tax rate, the more of each additional dollar the worker gets to keep.

Indeed, the report concludes, “the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.”

Capital Gains

The Bush tax cuts also lowered taxes on capital gains — the profits realized when assets, such as stocks or real estate, are sold. At least until the end of 2012, the top capital gains rate is 15 percent, down from 20 percent in the 1990s (the rate was 28 percent before that).

At the same time, those at the very top of the scale are making a higher percentage of their income from capital gains; in 2006, the top 1 percent made 38 percent if their money from capital gains, up from 31 percent 10 years earlier.

And when higher capital gains incomes combine with lower tax rates on that money, it makes mathematical sense that the richest household would increase their earnings faster than those lower down the scale.

Shifting Social Norms

Though harder to quantify than technology and tax policy, shifting social norms may also play a role in the growing income gap, say some economists. Society, as a whole, is simply less aghast at soaring salaries than it once was.

Outlining this theory in a 2002 New York Times column, Paul Krugman explained that after the New Deal and World War II, the national mindset tended towards equality of pay and more humble, community-oriented executives. Somewhere around the 1970s, however, those norms simply began to unravel, creating greater social acceptance for the sky-high executive compensation we see today.

But Why Do We Care?

If these factors help explain how the income gap got where it is today, they do not answer a perhaps even more important question: Why does it matter?

Register your own thoughts below, and come back next week for answers from readers and experts alike.

Recommended Reading

Thank you for reading. As an added bonus, the Salary.com editorial staff has compiled a recommended reading list regarding this topic. Enjoy: