The income inequality in the US.
Explanation of Solution
Table -1 shows the distribution of US income by households in 2008:
Table -1
| Personal Income Category | Percentage of all households in this category |
| Under $10,000 | 7.1 |
| $10,000-$14,999 | 5.8 |
| $15,000-$24,999 | 11.8 |
| $25,000-$34,999 | 10.9 |
| $35,000-$49,999 | 14.0 |
| $50,000-$99,999 | 17.9 |
| $100,000 and above | 11.9 |
| 20.5 | |
| 100.0 |
As per table -1, the highest 20% have received an income share of 50% in 2008. This is ten times more than the 3.4% than the lowest 20% received. The three quintiles in the middle get less that 50% of the total income before tax. When we combine the bottom three quintiles on top of two quintiles that receive almost twice of them. So, the fact is that the top to 20% are receiving as much as 80% at the bottom.
The government's effect on the income distribution happens through taxes and transfer payments. It has a slightly progressive effect of federal, state, and local taxes on distribution of income as people with a high income have a pay of a higher percentage of their income in taxes when compared to people with a lower income. The main contribution of the government for income equality happens through transfer programs i.e. 80% of the times. The benefit of this contribution goes mainly to people in the lowest quintile where 75% of the income that these people earn is through government transfer payments.
Though these statistics may suggest that the government is contributing heavily to equalize the income, it might be all correct. As the transfer programs provided to people with a lower income decrease the incentive to work so the income earned will be further down. Also, not all these transfer programs got to the poor. For example, in case of subsidies, farming always goes to the farmers that are wealthy. Middle and higher class students get the benefit of education funding by the government than the ones with a lower income.
Concept Introduction:
Income inequality: It is the unequal distribution of a household or an individual income across the various participants in an economy.
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Principles of Economics 2eEconomicsISBN:9781947172364Author:Steven A. Greenlaw; David ShapiroPublisher:OpenStax