Study Shows Increasing Gap Between Rich and Poor

by Brook Waldman

In Maryland, as well as in all but two other states in the U.S., the average income of the richest households has dramatically increased over the past 20 years. During the same period, the poorest families have steadily lost money.

A Washington, D.C. research group, the Center on Budget and Policy Priorities, released this information and other results of a major study on December 16, showing a state-by-state analysis of income trends.

The report looked at families with at least one child under the age of 18 and divided them into five groups of equal size according to their income level. Since the late 1970's the already-large income gap between the top and bottom fifths of families has become considerably larger.

Since the mid-1980's, the gap between the richest and poorest families has grown faster in Maryland than in all but 10 other states. Only in Alaska and North Dakota has the gap actually decreased instead of increased.

In Maryland, by the mid-1990's, the wealthiest families were earning 2.8 times as much as the middle fifth of families, and 11 times as much as the bottom fifth.

Since the late 1970's, the average income of the poorest 20% of families in Maryland has dropped $1,280, from $14,620 to $13,350, while the average income of the middle 20% has increased by $3,920 to $53,000. That of the richest 20% has increased by $39,700 to $147,970.

The report's figures are all based on before-tax income. All incomes from the 1970's and 80's have been converted to 1996 dollars after inflation. That income includes all wages, salaries, child support, welfare payments, interest income, and any other "pre-tax cash income," but does not include capital gains; nor does it take into account the effect of state or federal taxes. For any individual making more than $100,000 on any one job, only $100,000 was counted as income for that individual. Because capital gains and any excess income over $100,000 were not counted, the incomes of the richest families are in fact much higher than what is shown in the report.

Why are these trends happening? How can things be turned around? The report contains possible answers to these questions. It concludes that economic trends and government policies have been the forces that have created and perpetuated the income disparity evident today.

While economic growth has been charted for many years, this growth is mostly occurring among the rich and well-educated. With more and more technology being used in the business and industrial worlds, low-skilled jobs are disappearing rapidly. Once fairly high-paying and available virtually anywhere, manufacturing jobs are being replaced by computers and automation, a trend that began during the Industrial Revolution. It is now near-impossible to find a high-paying job without a college education. With a greater demand for highly skilled workers and a decreased demand for low-skilled workers, the gap between the incomes of high school and college graduates has grown tremendously, and can be expected to continue to do so.

To make ends meet, poorer families are incurring much more credit card debt than ever before. While some blame this on recent increases in credit card solicitations and advertising, and others say consumers should know how much they can afford, it is unarguable that households have been going farther and farther into debt. The Consumer Federation of America estimates that nearly 60 million families have credit card debts of an average of $7,000. Those unable to pay off their balances are incurring an average annual interest expenditure of $1,000. The poorer the family, the more significant that amount becomes. The overall credit card indebtedness of Americans amounts to over $4 trillion.

The American Bankruptcy Institute of Alexandria, VA, reports that one in 225 Americans declared bankruptcy in 1996, nearly equal to the rate during the Depression when one in 215 Americans went bankrupt.

Economic trends, for the most part, take their own course and cannot be altered easily. Government policies can help reverse this trend of disparity, however.

For example, the study points out that the federal minimum wage has fallen 18% in value since the late 1970's. Individual states, the researchers suggest, can compensate for this shortfall by mandating that state wages be higher than the national wage. Six states have already done this. Maryland has not.

In addition, federal and state policies concerning education, employment, training, and unionization could all be improved to keep the unemployment rate down and the average worker's income up.

Most of all, according to the report, the tax system can be improved. The Center on Budget and Policy Priorities says this: "While the federal tax system as a whole remains modestly progressive, nearly all state tax systems are regressive." Regressive taxes are those with a flat rate, making them much more significant for poorer consumers. "States rely more on regressive sales taxes and user fees than on progressive income taxes and therefore take a larger percentage of income from low- and middle-income families than from the wealthy," the researchers stated.

Brook Waldman, a graduate of Friends School, is enrolled at Wesleyan University in Connecticut.

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This story was published on January 7, 1998.