Income Tax & Income Disparities

Income disparities is a hot and sensitive topic that rears its head every time income numbers and tax reports are made public. According to a recent NYT editorial this trend seems to be going in favor of the rich. So seems like this not only a problem in growing economies like China and India but in established economies as well like the US.

According to the editorial:

"The agency found that in 2004, the latest year for which comprehensive data were available, the top 1 percent of households pocketed 14 percent of total after-tax income in the United States, up from 12.2 percent in 2003. That increase, the third largest in one year since the agency started keeping track in 1979, works out to an extra $128 billion. And yet despite that hefty gain, the effective federal tax rate of the top 1 percent decreased slightly.

In contrast, the share of after-tax income going to households in the middle of the income distribution fell to 15 percent in 2004, down from 15.4 percent in 2003 — the equivalent of a $29 billion loss. In that time, the share of their income going to federal taxes stayed about the same."

The editorial then goes on to explain the reasons behind this trend:

"One of the reasons the rich are getting so much richer than everyone else is that investment income is highly concentrated among the richest Americans and has grown robustly through much of the Bush years — unlike wages and salaries. But the rise in investment income hasn’t caused rich Americans’ income taxes to rise substantially because — thanks to the tax cuts of 2003 — investments are now taxed at about the lowest rates in the code.

Another reason for the after-tax advance of upper-income Americans is that an ever larger share of their salaries escapes the payroll tax that pays for Social Security benefits. The annual amount of income subject to the tax — now $97,500 — has been adjusted upward each year since 1982, in line with the increase in average wages. But as pay raises at the top of the income scale have increasingly exceeded the average wage gain, incremental adjustments in the wage cap have been inadequate. In 1982, only about 10 percent of all wages escaped the tax. Today, that figure is estimated at 15 percent. The administration has yet to call for raising the cap, though doing so is a matter of simple fairness."

The problem with all this is the lack of political will on both sides to fine tune the tax system. Unless we cut the rhetoric and step up to the plate this trend may only worsen.

Also see related news on MSNBC site.