The Shifting Financial Sands of Wealth Distribution

By: Barry_Elias

1913, the Federal Reserve Bank was created and the 16th amendment to the constitution was passed. This amendment provided Congress with the legal authority to tax.

At that time, the share of income earned by the top 1 percent, 0.1 percent, and 0.01 percent were 18.5 percent, 10 percent, and 4.4 percent, respectively. In 1980, these figures were dramatically reduced to 9 percent, 1 percent, and 0.5 percent, but by 2007 they increased significantly to 23.5 percent, 8.5 percent, and 3.0 percent (at or above 1913 levels).

The Tax Foundation, using data provided by the Internal Revenue Service (IRS), found the share of total adjusted gross income (pre-tax) for the top 1 percent increased to 20 percent in 2008 from 8.46 percent in 1980 (136 percent increase). In addition, its share of total federal income taxes increased to 38.02 percent in 2008 from 19.05 percent in 1980 (100 percent increase), while its average tax rate dropped to 23.27 percent in 2008 from 34.47 percent in 1980 (32 percent decrease).

A recent study by the Center for Budget and Policy Priorities (CBPP) analyzed income distribution from 1979 through 2007. According to CBPP, the top 1 percent increased their share of total after-tax income to 17.1 percent in 2007 from 7.5 percent in 1979. During this time, inflation adjusted after-tax income for the top 1 percent rose 281 percent versus the population average of 55 percent.

The CBO indicates the rise in after-tax income was proportionately greater for higher-income groups.

While the bottom fifth rose 0.4 percent and the middle fifth increased 2.4 percent, the top 1 percent rose 5.0 percent, and those with income exceeding $1 million rose 5.7 percent.

Much of this income redistribution resulted from the underlying dynamics of the financial industry during the past three decades.

A recent Nobel Laureate, who received the prize for financial engineering, confided to Paul Volcker, former chairman of the Federal Reserve Board during the Carter and Reagan administrations, that the financial engineering doesn’t add value to society; it is simply an intellectual exercise.

Financial engineering was employed to develop opaque financial instruments that obfuscated the true risk of investment. Legal entities were created to house these cash-flow, labyrinth-like products that, in many cases, extinguished true ownership and liability for all parties concerned (e.g., mortgage-backed securities).

(More on the how the financial industry metastasized into a dysfunctional enterprise next Friday.)

eliasbarry@aol.com

Barry Elias provides economic analysis to Dick Morris, a former political adviser to President Clinton.

He was cited and acknowledged in two recent best-sellers co-authored by Mr. Morris: “Catastrophe” and “2010: Take Back America - a Battle Plan.” Mr. Elias graduated Phi Beta Kappa from Binghamton University with a degree in economics.

He has consulted with various high-profile financial institutions in New York City.

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