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The Income Divide – Two Sides…

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Parade Magazine has a very interesting recap on the last year's economy and how it applies to the public. How Did You Do? gives a view into the state of the nation. There are quite a few statistics that I found surprisin, such as:

  • "Last year's 1.1% average raise was their first real pay increase in a long time. Workers' productivity grew an impressive 18% between 2000 and 2006"”but most people's inflation-adjusted weekly wages rose only 1% during that time."
  • "The cost of health care keeps rising faster than wages or inflation. Fewer employers offer health coverage"”and fewer employees can afford to buy it. The upshot: Almost 47 million Americans now are uninsured, and most of them are in families with at least one full-time worker."
  • "In the last five years, inflation-adjusted wages rose less than 1% a year for the vast majority of households. But for the top 5% of earners, they jumped 2.5% a year. And for the top 1% of earners, the gains were much bigger: In 2005, the average CEO made 369 times as much as the average worker, compared with 131 times as much in 1993."

The article also adds some anecdotal evidence by surveying many Americans. My favorite was, "Marie Ouano made $75,000 last year performing X-ray and MRI exams as a radiology technician but says housing in San Francisco is so expensive, she's not sure she can afford to buy a home on one income." I wish her good luck, but I think it's an uphill battle on that income. Perhaps she can manage a small starter condo.

On the flip side of the coin, Miserly Bastard says that the rich are paying too much tax. I believe this is a direct effect of the rich getting richer as the Parade magazine suggested.

Which side are you on?

Last updated on August 1, 2011.

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Economy

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8 Responses to “The Income Divide – Two Sides…”

  1. While I am one of those who believe that senior company executives are often overpaid (in effect a transfer of wealth from shareholders to the executives), it is only to be expected that in any economic expansion that people with capital to invest or whose incomes vary with economic performance will do relatively better than those on more rigid incomes structures.

    As to the continuing squeeze on the middle class – I do not see this trend changing anytime soon. What we are seeing is a very slow convergence between the cost (salary and benefits) that a person doing a job will earn in developed economies (such as the US) and emerging economies (such as India) which are able to provide much the same service (including, increasingly, quality) much cheaper. Put differently, there is an increasing supply of well qualified and very keen people who are willing to do the same job for a lot less money (where distance and technology permits) and will often work harder as well.

    The other side is that employees are ultimately a cost to the firms that employee them. In a world where competition is increasingly global, firms are placed under a lot of pressure to keep costs as low as possible. Take the car industry as an example. The US car makers are stuck with enormous costs (pension benefits for retired employees in particular) that their overseas competitors do not have to deal with. Unless they cut those costs (and come up with some better cars) they will continue to lose market share and destroy shareholder value while their competitors continue to thrive.

    Another way of looking at it is that the proportion of the working population that is able to exercise a degree of pricing power in connection with their employment is shrinking in response to shifts in both the supply of and demand for employees. The flip side is that those employees who are able to exercise a degree of pricing power have seen very significant gains in their incomes over the last decade or so.

    It’s not a rosy picture for those of us who work for a living – making it all the more important for individuals to get their personal finances in order.

  2. Kevin says:

    Here’s the comment I posted on the original article over at Miserly Bastard:

    I’m going to question the statistics as to the amount the wealthy pay in taxes as a percentage of their income.

    If you are a wage earner (i.e.: employee) there is very little you can do to shield income from taxes. However, if you are wealthier, you are likely to have a much wider array of tools available to you for shielding your money in ways that keep it from being “income”. This is especially true if you begin wrapping your money-making endeavors inside of personal corporations.

    According to a 1998 report by the Joint Economic Committee, 1998 saw 1467 filers with incomes over $200,000 per year who paid NO income taxes (in spite of the fact that this was what the AMT was meant to prevent).

    When you look at the tax rates it does look as though the wealthy bear a very unfair burden. However, the ability to shield much of their wealth distorts this. It is not at all easy to determine what percentages the wealthy actually pay in taxes.

  3. Lazy Man says:

    Trainee Investor, I couldn’t say it any better myself. It’s why I’m a little more overweight on foreign currencies compared to what most people would suggest. It’s one of the best ways I feel I can hedge against the very real present and future that you detailed.

    It’s also a key reason why I’m looking to diversify my income streams. My hope is that if one goes away, the others can step in and at least maintain some kind of minimum lifestyle.

  4. dong says:

    I’m gonna have to go over the miserly bastard’s and give him my two cents. I feel pretty strongly about this subject. The rich do not pay too much in taxes. Yes they pay more than poor but we have alot more to pay, and ultimatley we (i’m including myself here amongst the rich because it shouldn’t be a them vs us battle and on the national scale, it’s true) are the one who are benefitting the most by the rule of law that we have in this country.

  5. Q says:

    The rich people of this country pay a tremendous amount of tax. The top 50% of wage earners pay something like 96% of the taxes. How could it be any different – they’re the ones with the money. Poor people pay no tax – they have little to nothing to pay. We cannot run a government on their backs, as they have very little to pay.

    But to villify the rich for the amount of tax they pay is riduculous in my opinion. It’s class warfare, which is so unhealthy for our country.

  6. Foobarista says:

    We’re probably considered “rich”: we paid almost $60K in various taxes last year. We’re in the income area where we’re rich enough to pay a lot in taxes, but not quite rich enough to afford specialized tax planning, and since most of our income is salary income, it isn’t really amenable to tax tricks anyway. This is changing – we’re saving a lot and investing in various things and our income from investments is rising, but at the moment, I can do our taxes and tax planning as well as anyone I can afford.

    But in the defense of the poor: they do pay 15.7% of their income (at least when reckoned as their cost to their employers) in social security taxes. Most discussions of this kind ignore SS taxes (as well as sales taxes, lottery “taxes”, cigarette taxes, gas taxes, etc) and only focus on income taxes.

  7. Dong says:

    I don’t like the class welfare myself. It’s not about the rich vs. the poor. I just have a gut reaction when these discussion make it sound like the “rich” are getting vitimized. Even if you don’t believe in progressive tax system, the rich are going to pay more taxes in a flat tax system because they have more. I just don’t see how that’s unfair. We should be more concerned about what the govt does with tax money rather than who foots the bill.

  8. haven says:

    Our hh income is in the top .5% and I can tell you that the only tax break we get is for 401K deduction and charity. We paid over $250K in taxes last year, and we don’t qualify for IRAs or Roth IRAs, plus we have AMT. Unless you are a company owner and can have the company pick up the tab for everyday expenses like housing and cars, the burden is very steep. And “specialized tax planning” usually amounts to income deferral–risky because the company you work for could go bust and your deferred income becomes a very low priority liability–or questionable tax shelters which most people wouldn’t touch with a ten-foot pole. In the interests of fairness, I would really like to see more tax brackets.

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