IRS Confirms Widest Income Gap Since the 1920s

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13 October 2007: Death and taxes, bureaucracy and political lies, were the only guarantees in life. But now in the United States there is a new guarantee...if you've fallen behind financial survival, you stand no chance of making ends meet without winning the Lotto or hedging against the next Google stock. Poor schleppers.

Some might find it rather remarkable that the United States' own Internal Revenue Service (IRS) revealed in October 2007 that the nation now has the largest gap between rich and poor since the 1920s -- and it all happened during the current President George W Bush administration. (Not during the great job boom of the 1990s.)

If you, dear schlep, surmise some federal employee's head will role for pointing out the gap, you might be right, although we'll know more when that employee signs his $1 million book contract to "tell all."

The richest one percent of taxpayers in the United States earned 21 percent of all income in the year 2005 (the most recent year for which the IRS compared data.) The figure was up 19 percent from 2004. It is estimated that in 2006 the figure will have risen another 27 percent.

The data also pointed to a drop in earnings for those in the bottom 50 percent. Those poor schleps, none of which are federal employees, earned 13 percent of the available income in 2005. The figure fell 13 percent from 2004. It is estimated the figure will fall another 17 percent in 2006.

President George W Bush weighed-in on the data however and said higher income earners just have better skills -- and it is up to the poor schelp to get with the program.

However, the wider gap was attributed in part to President Bush's own tax relief program for capital gains. Wealthy folks paid about the same in federal income taxes in terms of percentages, but their investment gains were given a boost with new re-investment loopholes and a 5 percent drop in taxation. In other words, if one was already rich they could make more and keep more of the earnings.

Here are two simple examples how that would work.

On 29 April 2004 if you had $100,000 cash sitting around in your piggy bank, as is the case for most in the United States (right?,) the investor bid into Google to buy up 1,176 shares (GOOG.) Meanwhile, the bottom dweller, who thinks Google is rather neat, can afford to buy up 3 shares for about $255.

By October 2007 GOOG has risen 635 percent to $627 and change per share. Our six-figure investor cashes in, collects $737,352, and pays $95,600 in federal taxes (unless he uses a reinvestment loophole) and calls it a day. That investor could put the money in a savings account and damn near live off the interest depending upon his location and living expenses, but that isn't what the new wealthy class does. He'll reinvest into a hedge fund and multiply the next round by 10 or more, and the process repeats, and repeats again.

The bottom dweller though sells his shares and gets $1,881 -- and while he doesn't have to pay taxes on the earnings under the new plan, his winnings go towards personal credit card debt and other expenses just in order to live. So, it was a wash for the schlep, and he is no further ahead than he was.

In another example, using real estate -- given the recent boom, one homeowner who bought a house in 1997 for $100,000, was able to sell his house in 2005 for $670,000. This example is different, for he was able to take his winnings and buy another (although smaller) house free and clear. In other words, this investor no longer has a mortgage, and his take home pay just shot up.

The schlep in our story however, was never able to afford a house in the first place...so since rent inflation has risen on average of 27 percent since year 2000 -- unless the schlep was able to increase his income by as much during this same time he is now deeper into costs than he was before. Note: Income for the schleps of the nation has actually decreased given inflation in the past six years.

Fine examples of capitalism.




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