The Wealth Inequality Problem in One Chart
It’s clear that America’s financial and political systems are broken
The Chart of the Week is a weekly Visual Capitalist feature on Fridays.
It seems that people don’t agree on much these days, but there is one growing exception to that rule.
Across the board, Americans are finding that the “system” isn’t working for most people in its current state. Donald Trump and Bernie Sanders have locked into this sentiment to garner unprecedented support as outsider candidates, and there is an undeniable feeling in the air that something has got to give.
Why is there so much conviction that things must change?
The Wealth Inequality Problem
In today’s chart, we showcase the wealth inequality problem in the best way we could. The challenge with it was that literally the data goes “off” the chart with no easy way to show it.
On the chart, we plotted the “Median Net Worth” of different wealth groups between 1998 and 2013. This is based on a study that the Federal Reserve does about every three years on consumer finances.
When this data is compared in 2013 dollars:
- The Lower Class: Wealth has decreased by 26.5% for the bottom 20% of incomes
- The Working Class: Wealth has decreased by 52.7% for the second lowest 20% of incomes
- The Middle Class: Wealth has decreased by 19.1% for the middle 20% of incomes
However, one segment has shot up “off” the charts:
- The Top 10%: Wealth has increased 74.9%, soaring to a median net worth of over $1.1 million.
Then and Now
What’s changed between then and now?
We looked at this from a macroeconomic perspective to get a sense of what has changed between 1998 and today, using latest data from last month (May 2016).
- Unemployment is relatively flat between 1998 and today, but the amount of people actively looking for work has dropped by 4.5%. With more workers discouraged since the 2008 crisis, Workforce participation has dropped steadily. Economists also say this is likely due to a rapidly aging population.
- Inflation has averaged between 0% and 1% over the last three years. It is currently sitting at 1%. In 1998, inflation was closer to the Fed’s 2% target.
- The Federal Funds Rate, which is the rate that generally acts as a backbone for interest rates across the country, has dropped like a rock. Right now it was effectively 0.37% in May 2016, way down from 5% to 6% that existed for most of the 90s.
- National Debt has almost quadrupled in nominal terms from $5.5 trillion (1998) to $19.3 trillion today. In real terms, taking into account inflation, it has more than doubled.
- Money Supply (M2) has increased from $4.2 trillion (1998) to $12.7 trillion today. About $5 trillion of this increase came after the 2008 crisis.
And while there are many factors that go into wealth inequality, we believe that some of the above factors are worth exploring and understanding in detail.
For example, who benefits from 0% interest rates the most?
Who owns assets like real estate or stocks that have their prices propped up by these policies?
Who can borrow capital at low rates to invest or speculate on rises in these prices – is it the people that already have money, or the people without any?
Where does all the extra money that is added to the system go?
What is each $1 trillion of new U.S. debt spent on, and do the benefits of this added debt outweigh the costs?
Visualizing Unequal State Tax Burdens Across America
Poor families pay a higher share of their income towards state and local taxes than wealthy families. These maps show the inequitable tax burdens.
Visualizing Unequal State Tax Burdens Across America
What percentage of your income goes into Uncle Sam’s pocket?
Your answer will vary depending on how much you earn. Data shows that low and middle-income families pay a much greater share of their income towards state and local taxes than wealthy families.
Today’s visualization uses data from the Institute on Taxation and Economic Policy (ITEP) to map the effective tax rates—or taxes paid as a share of family income—across income groups at the state and local level.
Crunching the Numbers
The data reflects the effect of tax changes enacted through September 10, 2018, using 2015 income levels (the latest year for available, detailed income data). Both single and married tax filers are included, while elderly taxpayers, dependent filers, and those with negative incomes are excluded.
The report includes the state and local taxes for all 50 states and the District of Columbia. Taxes are broken into 3 broad groups:
- Consumption taxes – general sales taxes and specialized excise taxes
- Property taxes – including taxes on homes, businesses, and motor vehicles
- Income taxes – paid by individuals and businesses
Federal taxes are not considered.
Editor’s note: It’s worth noting that federal personal income tax has progressive rates, with the lowest earning bracket at 10% and the highest earning bracket at 37% in 2019. At a national level, property taxes are not charged and there is a very low reliance on excise taxes—both of which tend to be regressive as outlined below.
The report includes both taxable and tax-exempt income such as worker’s compensation benefits. It also includes estimates for the amount of unreported income.
Which States Have the Most Unequal Tax Burdens?
Across the U.S., there is a wide disparity in how taxes affect different income groups. Here’s how it all breaks down, ranked in order of tax system inequality*:
Total State and Local Taxes As a Share of Income
By State and Income Group
|RANK||STATE||LOWEST 20%||MIDDLE 60%||TOP 1%|
|50||District of Columbia||6.3%||9.8%||9.5%|
* The ITEP Tax Inequality Index measures the effects of each state’s tax structure on income inequality. In states that rank high for inequality, incomes are less equal after state and local taxes are applied than before. On the flip side, states with the most equality are those where incomes are at least somewhat more equal after state and local taxes are levied than before.
Washington has the most unequal tax burdens. Proportional to their income, Washington taxpayers in the bottom 20% pay almost 6x more than those in the top 1%.
At the other end of the scale, California has the most equal tax system. As a share of their income, the state’s poorest families pay only 0.84x what the wealthiest families pay.
Overall, however, the vast majority of tax systems are regressive.
On average, the lowest 20% of income earners pay 1.54x more of their income in taxes compared to the top 1%.
The Main Causes
Two main factors drive a tax system’s (lack of) equality: how the state designs each tax, and the state’s reliance on different tax sources.
To better explain how this works, let’s take a closer look at each type of tax.
Sales & Excise Taxes
These taxes apply only to spent income, and exempt saved income. Since families with a higher household income are able to save a much larger percentage of their income, and the poorest families can barely save at all, the tax is regressive by nature.
The particular types of items that are taxed affect fairness as well. Quite a few states include food in their sales tax base, and low-income families spend the majority of their income on groceries and other necessities.
Not only that, excise taxes are levied on a small subset of goods that typically have a practical per-person maximum. For example, one person can only use so much fuel. As a wealthy family’s income increases, they generally do not continue to increase their spending on these goods.
States rely on these taxes more than any other tax source, which only exacerbates the problem.
For the average household, the home makes up the majority of their total wealth—meaning most of their wealth is taxed. However, the wealth composition of richer families skews much more heavily towards stock portfolios, business equity, and other assets, which are exempt from property taxes.
While these types of assets are subject to taxes like capital gains and dividends, the distinction is that these taxes are levied only on earned gains. In contrast, property taxes are owed simply as a result of owning the asset.
What about those who don’t own homes? Landlords generally pass on the cost of property tax to renters in the form of higher rent. Since rent comprises a much higher share of expenses for poorer families, this makes property tax even more inequitable.
State income taxes are typically progressive. This means effective tax rates go up as income goes up. Here’s how the U.S. averages break down:
- Low-income families: 0.04%
- Middle-income families: 2.1%
- Top 1%: 4.6%
However, certain policy choices can turn this on its head. Some states have a flat rate for all income levels, a lack of deductions and credits for low-income taxpayers, or tax loopholes that can be beneficial for wealthier income groups.
Nine states charge no income tax at all, garnering reputations as “low tax” states—but this is true only for high-income families. In order to make up for the lost revenue, states rely more heavily on tax sources that disproportionately affect the lowest earners.
Evidently, states with personal income taxes have more equitable effective tax burdens.
Tackling Systemic Issues
Regressive state tax systems negatively impact the after-tax income of low and middle-income families. This means they have less to spend on daily expenses, or to save for the future.
Not only that, because wealthier families aren’t contributing a proportional share of tax dollars, state revenues grow more slowly.
For states looking to create a more equitable tax system, states with progressive systems offer some guidance:
- Graduated income tax rates
- Additional tax over a high-income threshold (e.g $1 million)
- Limits on tax breaks for upper-income taxpayers
- Targeted low-income tax credits
- Lower reliance on regressive consumption taxes
By implementing such policies, governments may see more tax equality—and more tax dollars for programs and services.
Hat tip to reddit user prikhodkop, whose visualization introduced us to this data.
Mapping the Global Flow of Foreign Aid
This infographic looks at who is giving – and who is receiving – the billions of dollars in foreign aid that flows between countries each year.
Mapping the Global Flow of Foreign Aid
Billions of dollars routinely flow between countries for a number of reasons that go beyond simply helping people in less wealthy nations.
Extending foreign aid can be a tool to help strengthen relationships with allies, to help bolster a military presence in a key area, or even to project a positive image at home and abroad. Of course, aid also helps less wealthy nations do all kinds of things, from constructing new infrastructure to recovering from humanitarian crises or natural disasters.
Today’s infographic, from Wristband Resources, is a comprehensive look at the flow of foreign aid funds around the world in 2017.
The visualization raises a number of questions. For example:
- Why does Japan send so much foreign aid to places like India and Vietnam?
- Why does Turkey—one of the top 20 economies in the world—receive so much foreign aid?
- And why did Ethiopia receive over $1 billion in aid from the United States?
Below we’ll answer key questions about foreign aid, while examining some of the more interesting relationships in detail.
What Constitutes Foreign Aid?
In simple terms, foreign aid is the voluntary transfer of resources from one country to another country—typically capital. Here are the six types of foreign aid:
Note: The graphic above measures official development assistance (ODA), as defined by the OECD. ODA excludes military aid and the “promotion of donors’ security interests” as well as transactions that have primarily commercial objectives.
Which Countries Give the Most Foreign Aid?
Every country’s budget is different, and priorities can change as the economic and political cycles progress. As of 2018, here are the countries that contributed the most foreign aid as a portion of their Gross National Income (GNI).
In a 1970 resolution, the UN challenged countries to spend 0.7% of their GNI on foreign aid. Today, only four countries—Sweden, Luxembourg, Norway, and Denmark—surpassed the United Nations’ official development assistance target.
Using this measure, all top 10 countries are located in Europe. That said, in absolute terms, countries like Japan and the United States are still major contributors of aid around the world.
Below are a few real world examples of foreign aid flow, and more context around why money is flowing between the countries.
Japan → India
India is the top recipient of foreign aid, with the majority of funds coming from Japan. The country received close to $2.4 billion from Japan in 2017.
In recent years, the growth of Japan-India relations is viewed as a counter to China’s expanding economic and political influence across the Asian continent. As China’s national banks continue to fund megaprojects around the world, Japan is helping to fill a similar role in India.
One major project currently under construction is the Mumbai–Ahmedabad High Speed Rail Corridor. To move the $22 billion project forward, Japan offered India a 50-year loan at a 0.1% interest rate, covering 80% of the project cost.
European Union → Turkey
European institutions contributed nearly $2.6 billion to Turkey in 2017. On the surface this may seem confusing, as Turkey is more developed than most nations receiving foreign aid—however, much of this funding stems from the migration crisis. In 2016, the EU struck a deal with Turkey to reroute any migrant arriving in Europe via the Aegean Sea back to Turkey. In exchange, the EU agreed to fast-track Turkey’s EU membership bid.
Turkey has been bearing the brunt of caring for refugees, and the EU has contributed significant funds to the effort. For example, funding for the Emergency Social Safety Net (ESSN) program in Turkey has reached $1.2 billion.
In 2019, EU-Turkey relations took a chilly turn as European Parliament voted to suspend Turkey’s EU membership bid, expressing concern over creeping authoritarianism and human rights violations.
United States → Ethiopia
In 2017, Ethiopia was under a state of emergency as the African country faced a third straight year of drought, and security forces and anti-government protesters clashed in the streets. Though the U.S. does provide plenty of military and security-oriented aid, this is an example of humanitarian aid in the face of a crisis.
The United States was also the top source by far for aid flowing into other countries in the region, including Kenya, Tanzania, and South Sudan.
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