Inequality: Mostly Among the 1%

The super-rich are outstripping the merely wealthy -- but the rest of us are a lot more equal than you might think.

After a brief pause for the Great Recession, income inequality is rising again, with the highest-earning 1% getting the lion's share of added income and the other 99% dividing the remainder.

But the picture of inequality that this paints is a little misleading. It turns out that there is a lot less inequality among the vast majority of Americans than there might seem, and it's not getting worse.

SEE ALSO: All Our Economic Outlooks

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The most common measure of inequality is the share of income earned by the top 1% -- the highest-earning 1.5 million individuals and couples. This was about 18% of all income in 2011, twice as much as when Ronald Reagan was reelected president in 1984. Because one-percenters get a large portion of their income from investments, their share of all income fell to 17% after the stock market plunged in 2008.

Since then, the stock market's robust recovery and meager growth in the wages and salaries that the lower 99% rely on has meant that an overwhelming share of total income growth has gone to the wealthiest citizens. In 2010, $9 of every additional $10 earned went to the top 1%, and data due in a few months will show that the same happened in 2011. With stocks up better than 10% already this year and high unemployment holding down wages and salaries, that trend will continue in 2012.

But probe a bit deeper and another picture emerges. The gap between most one-percenters and most of the 99% isn't that wide because the most extreme inequality is at the very top of the income scale. The chasm between the super-rich -- the highest-earning 15,000 tax filers -- and others in the top 1% is so large that it skews the overall result. Factor it out, and even inequality between the poor and the well-off is far less than 10-to-1. Though that's still too much inequality in the view of some people, it's not the extreme inequality that often makes the headlines.

Consider how much inequality there is within the 1% richest. The average yearly income for this group is $418,000. The average income for the top 1% of them -- the 15,000 in "the 0.01%" -- is $23 million, or more than 50 times as much.

Contrast that with the ratio between the $418,000 average income of the 1% and the average for all tax filers -- $68,000 in 2010. Even after accounting for the fact that this $68,000 is inflated a bit by the big earnings at the very top, the average top earner receives less than six times as much income as the average taxpayer. There's much less distance between the average American and the average rich person than there is between the merely rich and the super-rich.

Sliced another way, there is a similar difference between the bottom of the 99% and the top of it. According to one study, when government subsidies and employer-funded health insurance are included, the ratio of well-off taxpayers at the 90th percentile of income and the poor at the 10th percentile is also about 6-to-1. And this measure of inequality isn't getting wider. That 6-to-1 ratio is unchanged since 1990s, and the ratio was roughly 5-to-1 in the 1980s.

By contrast, inequality within the top 1% soared over that same period. In 1984, the super-rich 0.01% earned $1 out of every $9 pulled in by all of the richest 1%. By 2010, the super-rich were hauling in $1 of every $5 earned by one-percenters.

In fact, the concentration of income among the super-rich is about as high as it has ever been, and much higher than it was for most of the 20th century. They collected about 3.3% of all income in 2011, a little below the record 3.5% in 2007 and triple the level in 1984. Between World Wars I and II, the average for the super-rich was 2% of income, and from 1946 to 1991, it was 1% of income. Then it started rising.

Meanwhile, inequality among the vast majority of people isn't so wide, and it isn't getting wider. Even after a brutal recession that lowered living standards for most people, the average American isn't losing ground compared with most others, even if the gulf between average and very wealthy is growing broader. Cornell University economist Robert Frank, an expert on public attitudes about wealth, argues that perceptions about living standards are based as much on one's relative position compared with neighbors and coworkers than on actual dollars and cents.

If, in F. Scott Fitzgerald's words, the very rich "are different from you and me," the super-rich are so different that their wealth prompts more curiosity than outrage. The wealth of Warren Buffett and Mark Zuckerberg is beyond the aspirations or care of most people in today's challenging economy. What's another billion or two?

John Maggs
Senior Economics Editor, The Kiplinger Letter