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Here's what's driving the gap between the richest and poorest Americans

Economic inequality between the richest and poorest Americans continues to widen, exacerbated by pandemic stimulus and corporate inflation, according to new research and expert commentary.

So what's driving this ever-growing gap? Much of it has to do legislative policies and demographic dynamics that has led to super wealthy Americans avoiding taxation in certain U.S. state while non-white household income remains largely stagnant.

According to data from the Federal Reserve, household wealth among the top 1% of Americans grew from $17.08 trillion in Q3 2010 to $35.3 trillion in Q3 2020, and currently sits at $42.13 trillion. (Wealth is defined as the value of all assets of worth owned by a person or entity, while income is the money that the person or entity received in exchange for labor or products, according to Investopedia.)

On the bottom end, however, "modest gains have been largely temporary," Sarah Anderson, the global economy project director at the Institute for Policy Studies and co-editor of Inequality.org, told Yahoo Finance. She noted that the bottom 50% of households, which is nearly half of the U.S. population, owns only 2% of the nation's wealth, as of 2019.

For the top 0.1% of earners (the multi-millionaires and billionaires), both household income and earnings have soared over the past decade as part of an ongoing trend. As of 2018, the concentration of income among the top earners is almost equal to levels seen just prior to the Great Depression in the 1930s. The U.S. also saw similarly high levels of income concentration ahead of the financial crisis in 2008.

“At the top end, U.S. billionaires have enjoyed explosive growth in their combined wealth, in part driven by taxpayer-funded stimulus spending and record corporate profits in 2021," Anderson said.

Companies that suffered major corporate losses during the height of the pandemic recovered mightily in 2021 with corporate profits growing by 22.6% that year, according to the Bureau of Economic Analysis (BEA). Meanwhile, compensation for the chief executives of large U.S. corporations boomed in the past decade while worker wages remained flat, according to Inequality.org. In 1980, the ratio between CEO pay and worker pay was around 42 to 1. Last year, it was 324 to 1, Anderson said.

“The CEO pay system also exacerbates income inequality by incentivizing top executives to spend company resources on stock buybacks, which artificially inflate the value of their stock-based pay while siphoning funds that could be going towards worker pay or other long-term investments,” she said.

'Billionaire enabler states'

Many of the richest Americans live in what have been categorized as “billionaire enabler states,” according to a recent report by the Institute for Policy Studies (IPS), which has allowed them to retain much of their wealth.

These 13 states — which include Texas, Florida, Nevada, Illinois, and Ohio — “enable” wealth to be easily hidden through the state taxation system as taxes are cut for the richest households, the report said, reiterating the findings of the Pandora Papers that the U.S. is a "global tax haven."

The report highlighted three key indicators of states that help the ultra-rich shield their wealth: low or no taxes, secrecy, and trust longevity.

“The same states that morph their trust laws to help billionaires are often the same states that have the most regressive tax systems that overtax working people,” said Chuck Collins, the author of the report and director of inequality and the common good at IPS.

States with weak inheritance or estate taxes tend to also be the top enabler states that allow Domestic Asset Protection Trusts — trusts that protect trust assets from the settlor's creditors.

"There is a significant correlation between regressive state taxation systems, which hurt the poorest residents, and trust-subservient state laws," the IPS report stated.

Gender and race

Unsurprisingly, gender and race seem to play a role in wealth inequality.

“When you compare Black, Native, Hispanic women with white men, you see the intersection of race and sex," Childers said. "While white women have earnings that are 79% of white men’s earnings, Black women’s earnings are just 63% of white men’s earnings, and Native and Hispanic women’s earnings are an even smaller percentage of white men’s earnings."

Since the 1990s, racial wealth inequality has doubled. As of 2017, 15% of the top earners are white families as one in seven white families are now millionaires, according to The Washington Post.

“Sadly, inflation is only making things worse for the majority of people," The Debt Collective, a union working towards eliminating debt, told Yahoo Finance in a statement. "When costs rise, wages stay low, and the financial sector is under-regulated, people have no choice but to borrow to make ends meet — particularly people who lack intergenerational wealth and who face pay discrimination on that job (i.e. Black and Brown people and women).

"To address inequality," they added, "we need to raise the minimum wage, raise taxes on corporations and the rich, and cancel debts for the working and middle classes."

Union benefits

Union membership rates also have an effect on wealth and income inequality, according to Chandra Childers, a senior policy and economic analyst at the Economic Policy Institute (EPI).

"Unionized workers have higher earnings than non-union workers, and the states with lower earnings tend to be right-to-work states," Childers told Yahoo Finance. (Right-to-work states mean an employer cannot require their employee to join a labor union as a condition of employment.)

Equipped with a surgical glove, a face mask and a long stick, a jobless man named Paul panhandles at an intersection in Falls Church, Virginia, April 3, 2020. REUTERS/Kevin Lamarque
Equipped with a surgical glove, a face mask and a long stick, a jobless man named Paul panhandles at an intersection in Falls Church, Virginia, April 3, 2020. REUTERS/Kevin Lamarque

Unions also help reduce racial wealth gaps and unemployment by creating job security, according to a report by the liberal think tank Center for American Progress (CAP).

Workers are less likely to receive fair compensation when union membership declines, regardless of whether they are union members or not. In 2020, only 10% of the workforce was represented by unions.

At its peak in the 1940s and 1950s, the inequality ratio between union workers and the top 10% of earners was nearly 1:1 whereas in 2019 it was 1:4.

"As union strength steadily declined — particularly after 1979 — income inequality got worse, and it is now at its worst point since the Great Depression," EPI stated in a report. "Deunionization depressed the wages of middle-wage earners but had little impact on high-wage earners and therefore greatly increased wage inequality between these two groups."

Tanya is a data reporter at Yahoo Finance. Follow her on Twitter.

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