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The One Percenters and the Great Divergence

by on February 16, 2014 7:25 AM

For centuries, the United States has been home of the American Dream, which included the opportunity for prosperity and success for all.

However, a recent report shows that the U.S. has the worst income inequality in the developed world. In addition, our chances for moving poor people up the economic ladder are, well, poor.

For instance, when Canada is compared to the U.S., it has twice the economic mobility of Americans. These issues are a detriment to us as a society and our potential for economic growth.

The 1% is a topic of much debate recently. Let's start with who makes up the 1%.. Basically, it stands for the top 1% of earners, in this case, in the United States.

The top 1% of American households had pretax income of $394,000 in 2012. That income includes wages, pension payments, dividends and capital gains.

The 1% demographic has changed since the 1970's. The new 1% are top earners who are at the top of their fields, executives or entrepreneurs.

In the past, the rich were people with pools of wealth who passed that wealth through inheritance and thus transferred that wealth through estate taxes and future generations, who were not good stewards of the wealth. The new top earners' share of American income has been growing for three decades and recently reached a level not seen since 1928 (the Roaring Twenties and the year before the stock market crash).

Why are the rich getting richer and is it a problem? Most research determines that it is an issue when a majority of a nation's populace's income is not keeping up with inflation and does not have the opportunity to move higher on the economic ladder.

For instance, the highest earners' income increased 31.4% from 2009 through 2012, while everyone else saw their income rise by only .4%. Particularly disturbing is that while the 1% has gained in their proportion of wealth, as of June 2013, 15% of our population was on Food Stamps.

The causes noted for the drastic income inequality are many. Typically, the rise in income inequality is keyed to the rise in technology. Technology helped increase productivity but also replaced many low wage earners with machines. It increased the skill premium for workers.

The ability of higher earning families to access better technology perpetuates itself. A student who is able to go home and research on the internet using a high-end laptop with high speed internet is farther ahead than their counterpart who has dial-up or no internet access or no computer.

In addition, higher education lends itself to better incomes but the inflation rate on college tuition and fees has run 4.2% for public four-year institutions. The cost of college is easily handled by the affluent but middle to low income families typically must take on debt to put children through college. This puts middle/low income young adults at a disadvantage by starting their earning years with a level of debt payment that can be difficult (the average student loan debt is $29,400).

The outsourcing of manufacturing has led to less opportunity for low skill, high income jobs in the United States.

All the issues above and many more create income inequality and they have occurred in most developed countries. However, the United States stands out with the highest level of income inequality among developed nations. Therefore, the U.S. must have policies and institutional differences that perpetuate the inequality.

The first is the ability for high income earners to have access and influence on political matters through contributions to politicians and the admission to fundraisers, benefits, etc, that leads to familiarity. The U.S. marginal tax rate for the top 1% has reduced 47 percentage points since the early 1960's. The cost of United States' health benefits has increased and thus more money is geared toward this employee's cost than increasing the employee's wage. This has a larger impact on the rank and file employee then a high level CEO.

Given the various conclusions from research and economic papers, change is needed to limit the effects that high wage earners can make on public policy. This is the opposite of what Tom Perkins, a rich venture capitalist, suggested at a recent speaking engagement. Mr. Perkins suggested that only taxpayers have the right to vote and if you paid more in taxes you received more votes.

The wealth effect has already given the rich undue influence on politicians. Creating a better education system and more funding for that education from kindergarten through higher education for those in need with intellectual promise is probably the biggest consideration. I know many people who have worked hard for their wealth so the key is to incentivize work and increase the possibility of upward mobility.

A key finding in studies is that there are better possibilities of economic mobility when different economic classes live in the same region and are not cut off from each other in separate geographical regions. This is important when thinking about subsidized housing.

There are so many things to consider that they can't fully be covered in this article. Helping change income inequality is something that everyone needs to keep in mind when making policies, determining educational opportunities, setting taxes and so many other things that can influence the future of this country and its citizens.

It is not a 'persecution' of the wealthy but a way to allow more people the ability and opportunity to climb that ladder, make a decent living wage, and create policies that benefit everyone and create a level playing field.

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Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at jloy@nestlerode.com.
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