Diving into the divide between the rich and the rest of the us

By Roshan Pourghasemi

• More of a historical-type article that brings in recent context/history with current events

• What was sentiment toward top 1%/elite rich pre-2008? What about after 2008? What about now?

• What are some of the biggest discrepancies facing this kind of income inequality? From a personal finance perspective.

  • Not necessarily structural or economy-based, but also in personal finance habits/behavior

  • Talk more about the independent differences (stuff that people can do/change themselves), not really think-tank-type research on income equality (there’s lots of literature about that already)

Abstract

Throughout American history, income inequality has been a large cause of conflict between the top 1% and the rest of the American population. The problem was exasperated following the pandemic, where American Billionaires saw their wealth grow substantially while a vast majority of Americans were living paycheck to paycheck. By exploiting certain systems in place, the rich’s wealth grows, and, by replicating some of their tricks, you can see your wealth grow as well.

It is no secret that the gap between the top 1% and the average American is growing with every passing day. This difference was especially highlighted during COVID. When average American families were forced to live paycheck to paycheck and rely on stimulus checks, Billionaires saw their net worth increase by 62% on average. While income inequality is certainly more pronounced in a post-pandemic world, it isn’t an entirely new concept. Measurements began in 1915, and understanding the historical trends will help you better understand how the current problem was created.

Key Takeaways

• Throughout American history, there has been fluctuating levels of income inequality, with the most occurring in the early 20th century.

• We saw income inequality shrink from 2007 - 2016, but we then saw a substantial rise following policy in 2017.

• The 1% have a plethora of resources and consultants to help them game the system, but there are actions average Americans can take to try and duplicate the 1%.

• Becoming financially literate, generating passive income, and using lesser known financial instruments, like Security Backed Lines of Credit, will allow you to act like the wealthiest people in America.

1913-1941 and The Great Compression

One of the first notable actions the government took to work against income inequality was the establishment of income tax in 1913. A brief depression from 1920-1921 saw the gap in income shrink, but it then peaked again in 1926 and 1941. Wartime measures from the Roosevelt administration, such as Social Security, caused the gap to shrink once again. Even still, at certain points during this period, the top 1% of earners made about 20% of all American earnings, one of the highest levels of all time.

Then came a period from 1937-1967 which has since been dubbed “The Great Compression”, where income inequality fell substantially. Due to New Deal policies, stronger worker’s unions, and strong post-war economic growth, the American middle and lower classes saw their income rise substantially.

The Increase From 1979-2007

​​Starting in about 1980, the richest Americans saw their share of the income of the United States grow substantially. With the implementation of lower inflation and tax cuts, the top 1% of earners saw their income grow 275%, compared to 65% for the next 19%, just under 40% for the next 40%, and 18% for the last 20%. The highest earners in the middle class saw their income rise much more than the next 60% due to the rising attendance of colleges and the higher post-graduate incomes that came with attending university.

The Great Recession and Beyond

Prior to the 2008 Great Recession, income inequality was at one of the highest levels it had been in American history. Due to the impact of the Great Recession on investment income, which is where the extremely wealthy held much of their wealth, the uber-rich saw their share of the American earning pie decrease greatly. Of course, average Americans saw their income fall as a result of the recession, but, at least by percentage, their income fell less than the extremely wealthy.

This substantial difference in income loss is due to many factors, but the Obama administration’s actions definitely played a large role. They enacted tax increases on the top earners, while also only extending the Bush tax cuts for the bottom 98-99% of earners. The Affordable Care Act also shifted an estimated $21,000 in after-tax income from the average top 1% household due to the investment and Medicare tax. Furthermore, the Obama administration enacted some increases in anti-poverty infrastructure, such as Food Stamps and unemployment insurance.

Following the Tax Cuts and Jobs Act of 2017, which saw personal and corporate income tax rates decrease, income inequality once again increased. This led to the U.S. Billionaires paying a lower effective tax rate than the working class for the first time in American history. A report from the CBO said that both the working class and the 1% will see their income increase, but the top 1% will see their wealth increase substantially more. Still, there are many potential causes for this added income inequality. From the decrease of labor unions to the outsourcing of cheap labor to Asian countries, the average working American does not have many factors working in their favor. Furthermore, the college premium increases everyday, so it has become even more difficult to use education as a way to increase your socioeconomic status. These, along with a multitude of other factors, work in tandem to increase the extremely wealthy’s share of income while not doing much to help the rest of us.

How to Act Like the 1%

It is difficult to emanate the behavior of the 1%, since their vast amounts of wealth allow them to access resources and special privileges that most of us have never even heard of. Still, there are actions that they take that the average person can take as well.

First and foremost, the richest people in the United States are extremely financially literate. Of course, they have experts and consultants who are paid large sums of money to give them the best financial advice possible, but that doesn’t mean they have no idea what’s going on. It is of utmost importance that you become financially literate as well, and the Knowledge Base is a great resource for achieving just that. Furthermore, they try to make their money work for them and create some source of passive income. This is achieved through investing your money in all sorts of assets. Whether it is real estate, the stock market, or trading cards, the richest find some sort of asset which they know will appreciate and then let time make money for them. Also, the rich use lesser known financial instruments to get advantages and avoid taxes. A great example of this is a Security Backed Line of Credit, where they take loans out against their assets to avoid selling and paying taxes while also getting access to cash.