What is Causing Wealth Gap
And the gap gets bigger when the difference between the groups is related to income rather than starting assets. If, instead of being born with $1 more than you, I earn $1 more than you each hour, the wealth disparity will be exacerbated.
U.S., the richest 1% of Americans in 2006 garnered the highest share of the nation's adjusted gross income for two decades, and possibly the highest since 1929, according to Internal Revenue Service data.Source and more reading. The top 1% is paying more than they ever have before, but they're also making more than ever before - both inflation adjusted and relative to others. The real question is NOT "why hasn't the tax system kept up" but instead "why has the top 1% enjoyed such tremendous growth?"
Meanwhile, the average tax rate of the wealthiest 1% fell to its lowest level in at least 18 years. The group's share of the tax burden has risen, though not as quickly as its share of income.
Many people have suggested the technological revolution increased gains in the top 1%. This theory doesn't line up very well with what we know:
Most theories of the rising education premium attribute it to skill-biased technological change generated by the high-tech computer industrial revolution. But the high-tech boom's effects on overall productivity became large only in the second half of the 1990s, well after the biggest increases in inequality. The timing doesn't fit either.Tyler Cowen has another theory:
My intuition is that there has been an increase in the ability of very smart and very wealthy people to buy up undervalued assets and turn them into greater value . . . American entrepreneurs were building up capabilities which exploded in value once the economy stabilized in the early 1980s.Perhaps this explains much of the growth until the 90s, but then what? The depressed asset prices of the 70s were soaring in the 80s, surely these "very smart and very wealthy" people didn't leave so much on the table during the 80s that this trend could continue through 2007 (which is the latest data I've looked at). Does the educational and technological improvements explain the gains from 1990s through 2007? If so, why did the gains all accrue to the top 1% rather than all those who leveraged increased technology and education?
Currently, I think the best theory suggests it is simply the result of globalization. As we know, trade always leaves both trading partners better off. And in all but a few contorted situations, trade leaves both countries as a whole better off. However, trade provides increasing returns to those producing goods at a comparative advantage, and decreases returns to those producing goods at a comparative disadvantage. Again, except in really unusual fringe cases, economic models (Heckscher-Ohlin, Specific Factors, and New Trade Theory) predict the gains to those with the comparative advantage exceed those producing at a comparative disadvantage.
I suspect this explains a lot of the top 1% gains. The U.S. seems to have a comparative advantage in capital intensive goods & services. I'm including human capital in the "capital" category. Those who command these inputs are generally wealthy. International trade benefits these individuals disproportionately. The U.S. seems to have a comparative disadvantage in labor intense goods and services. Labor is owned by each individual, and so individuals without capital or human capital would be harmed by international trade.
If true, I don't think this means we should stop trading. It simply means we need to continue building human capital. Arguably, it would also suggest we should continue our transfer systems, and perhaps ensure trade is pareto optimal for everyone.