A visit to the glitzy section of any city in America will give you the idea that we don't know what to do with all the money we have. You get the same impression at any high end mall in suburbia.

In fact, income thins out pretty quickly. According to the most recent IRS statistics on tax returns (for 2003), households needed at least $295,495 to be in the top 1 percent; $130,080 to be in the top 5 percent; $94,891 to be in the top 10 percent, and $57,343 to enter the top 25 percent.

Yes, you read that right. If your household income is over $57,343, you're well toward the front of the line when the checks are handed out. If your income is below $29,019, you sink into the bottom 50 percent.

Increasingly, those in the bottom 75 percent---households with incomes below $57,343--- are starting to look like a long, slow train wreck. Without recognition of the problem, the entire country could find itself in dire straits pretty quickly.

Let me show you why.

In the ten years from 1993 to 2003 income has continued to concentrate. While the bottom 50 percent of earners had 14.92 percent of income in 93', they had 13.99 in 03'. Similarly, the top 25 percent have enjoyed an increased share of total income, rising from 62.45 percent in 93' to 64.86 percent in 03.' This is pretty much what you'd expect over a period of rapid change. Those with leverage increase their incomes. Those without leverage don't.

Over this period the dividing line income for the bottom 50 percent has risen from $21,179 to $29,019, rising 4.3 percent a year. Had the income line only risen with inflation it would have risen to $26,504. And that's an important fact: Even the bottom of the income scale has gained some purchasing power over the period---about $2,515. (See table below)

Combine that additional income with declining interest rates on home mortgages, a period of weak to declining rents for apartments, a multitude of low-interest and no-interest offers from stores and car manufacturers, and the people that do a lot of the heavy lifting in our society have gotten along.

Those with earning power have done a lot better than just get along. Earners at the top 1 percent line have gained $63,040 in purchasing power. Earners at the top 10 percent line have gained $12,198 in purchasing power while seeing the portion of income they spend on income taxes decline from 20.2 percent to 18.5 percent. Earners at the top 25 percent line have gained $5,570 in purchasing power.

  

The Vulnerable Bottom of the Income Pyramid

This table shows the income needed to be at each income level in 1993 and 2003. It also shows the income needed in 2003 to have the same purchasing power as in 1993, calculates the gain in real income for each level, the percent of income paid in tax, and the average tax rate as a percent of income.
   Top 1 Percent Top 10 Percent Top 25 Percent Bottom 50 Percent
1993 Income (1) $185,715 $66,077 $41,210 $21,179
2003 Income (2) $295,495 $94,891 $57,343 $29,019
1993 Income Adjusted for Inflation (3) $232,415 $82,693 $51,573 $26,504
Gain   (1)-(3) $   63,040 $12,198 $   5,570 $2,515
Percent of Income Taxes Paid 34.27% 65.84% 83.88% 3.46%
Average Tax Rate as Percent of Income 24.31% 18.49% 15.38% 2.95%
Source: http://www.taxfoundation.org/taxdata/show/250.html
  

Unfortunately, gains for the bottom 75 percent are now vaporizing. It would take a major hit to destroy the $12,198 gain for those at the top 10 percent line.

That isn't the case for those in the bottom 50 percent. Their entire $2,515 purchasing power gain since 1993 may already be history. Skeptics should consider this brief list:

•  With the typical household consuming about 1,000 gallons of gas a year, an increase from $1.50 a gallon to $3.00 a gallon means a purchasing power loss of $1,500.

•  Rate increases for electricity and natural gas.

•  Rising medical co-pays and other out-of-pocket expenses for healthcare plus rising employee healthcare insurance premium costs. Premium costs were up 10 percent in 2004 alone.

Another way to see the same thing is to examine wage gains. In 2004 the average weekly earnings of private nonagricultural workers rose by only 2.2 percent. The Consumer Price Index rose by 3.3 percent over the same period. This year has been a replay--- year over year wage gains are running less than 3 percent while inflation has ramped up toward 4 percent. And all this assumes we believe the CPI is an accurate reflection of the inflation we experience.

Can the politicians work magic with tax reform?

No way. If the federal income tax was simply eliminated for every household in the bottom half it would only liberate about 3.46 percent of their income--- less than inflation for one year.

Bottom line: Unless there are some real wage gains for working stiffs---soon---we're heading for a recession.

On the web:

CPI based inflation calculator

Summary of U.S. Income Tax Data