Investment Contrarians

The Rich and Poor Divide Isn’t Good for America

By for Investment Contrarians |

Rich and Poor Divide Isn’t Good for AmericaThere is a crisis in America, relative to the widening income gaps between the rich, the middle class, and the poor. This ultimately impacts consumer spending.

In the fiscal cliff talks, President Obama decided to compromise on the Bush-era tax cuts after raising income taxes on those individuals earning in excess of $400,000 annually and over $450,000 for married couples. These groups account for roughly the top one percent of income earners, according to the Tax Policy Center. (Source: “Fiscal Cliff Deal Will Raise Taxes On 77 Percent Of Americans: Tax Policy Center Analysis,” Huffington Post via Associated Press, January 2, 2013.)

The World Economic Forum suggested the widening of the income gap will have a global impact. (Source: “Income disparity, debt lead risk list,” Yahoo! Finance via Associated Press, January 8, 2012.)

The failure to achieve tax increases for all income earners making over $250,000 was a disappointment to President Obama, and it further increases the widening gap between middle-class America and the top one percent. With the income gap between the rich and poor widening, this is becoming more of a major issue that will need to be addressed, as it impacts consumer spending.

In my view, this is an issue that needs to be dealt with, as there is a societal need to help the less fortunate. Of course, paying higher taxes is a form of income distribution, but given the tax loopholes, the current system of taxes as an avenue for income distribution needs to be looked at. This concept of income distribution in America and other industrialized countries is becoming a real problem, especially with the Great Recession that began in 2008. Lower income levels impact consumer spending and economic growth.

The median family income plummeted to an inflation-adjusted $45,800 in 2010, compared to $49,600 in 2007, according to the Survey of Consumer Finances published by the Federal Reserve. The decline impacts consumer spending. The survey also indicated that the top 10% of households made an average of $349,000 in 2010 and had a net worth of $2.9 million. This translates into lower consumer spending by the middle class as income levels fade.

What is worrisome is that the recession resulted in a greater disparity in incomes between the rich and the poor, which impacts consumer spending. According to AFL-CIO, the average S&P 500 CEO earned $12.9 million in 2011, which is 380 times higher than the average income of a worker in the U.S. that was $33,947.

In America, the rich are getting richer while the poor are getting poorer, and it’s all impacting consumer spending.

With more than 48 million Americans using some form of food stamps (source: U.S. Debt Clock, last accessed January 8, 2013), which impacts consumer spending, there is a great disparity of income in this country. The same is true in emerging countries, like China, India, Brazil, Russia, Venezuela, and others, where the rich control the wealth, but the middle class is key to consumer spending.

The income gap is widening. In 1962, the top one percent of income earners had a net worth of 125 times the median household, according to the Economic Policy Institute. The income gap surged to 288 times in 2010 and is getting worse. This means less consumer spending from the middle class, which is, again, the key to economic growth.

Of course, the gap will continue to be significant, as the rich have a much larger base of wealth to work from and can accelerate the growth of their net worth much quicker. Making two percent on $10.0 million is a lot better than earning two percent on $1,000.

Whatever your views on income distribution—and there will be some who feel the current tax structure is correct—the problem is that income disparity inevitably causes societal issues, and in the long run, this cannot be good for America and will impact consumer spending.

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