As I have noted quite a few times, income inequality in America is greater than income inequality in Europe, but that's only because almost everyone is economically better off here, except that it's a tie at the bottom:

Details on how I computed these numbers can be found in prior posts (e.g., here). The greater equality in Europe is achieved not by increasing the welfare of the poor but by dragging everyone else down. Maybe that's a good idea, but someone would need to give me a good explanation before I would come around to that way of thinking.
As I noted here, a recent analysis by European economists suggests that Europe is 10 to 20 years behind the US in terms of economic development. That being the case, I suppose I could modify the chart shown above like this (note that this next chart is hypothetical):

That is, perhaps income inequality in America over the last 20 years or so has occurred because the lowest incomes have remained about the same while the upper incomes have increased (more so the more you make). In fact, as I am going to show you now, that appears to be the case.
The pre-tax and after-tax income data reported by the Tax Policy Center was recently updated to include values for 2004, so I analyzed those data again (you can find the data here). First, let me show you what after-tax incomes look like from 1979 to 2004:

The chart breaks the population down into fifths (or quintiles), and the numbers are in constant 2004 dollars to remove the effects of inflation. As you can see, the upper quintile (i.e., the top 20%) exhibits a clearly increasing trend over the years. But before you fly into a fit of anti-Bush rage over that fact, note the vertical lines in the graph. The blue line marks the beginning of the Clinton years; the red line marks the beginning of the Bush years. The rich were doing very, very well under Clinton, and income inequality was increasing enormously during his watch. The bump in the road that you see for the top 20% at the start of the Bush administration occurred because the stock market bubble crashed at about the same time we were attacked on 9/11. Shortly thereafter, the incomes of the top 20% began to increase again. But the point is that the income inequality issue is not a Bush phenomenon. It's been going on for a long time, even when Saint Clinton was in charge.
Are only the top 20% doing better? It looks that way at first glance, but let's remove them from the chart and look at the remaining 4 quintiles:

Now you can see that almost everyone is getting better off in America. The one exception is that incomes for the lowest quintile have not been increasing over the years. Thus, it really does look like Europe today is much like America was 20 years ago.
Why does income increase faster the more you make? No one is sure, and there is a debate about whether it is a real phenomenon or simply reflects where income is reported on tax forms. Alan Reynolds of the CATO Institute makes this argument:
There are frequent complaints that U.S. income inequality has increased in recent decades. Estimates of rising inequality that are widely cited in the media are often based on federal income tax return data. Those data appear to show that the share of U.S. income going to the top 1 percent (those people with the highest incomes) has increased substantially since the 1970s. However, there have been large changes in U.S. tax rules over time that have made a dramatic difference on what is reported as income on individual tax returns. Tax changes induced thousands of businesses to switch from filing under the corporate tax system to filing under the individual tax system. ... Studies of inequality that are based on tax return data usually exclude transfer payments, which results in exaggerating the shares of income received by those at the top by ignoring growing amounts of income at the bottom.
I don't know if there will ever be a resolution of this debate, but I do know that charts like the ones that I show above are going to lead to demands that we increase taxes on the wealthy.
Maybe we should, but I think a better approach would be to obtain a greater understanding of why this is happening and then deal with any inherent unfairness in the system that might be causing it. If it is not a tax-rate phenomenon, then I wouldn't immediately use the brute-force tax-rate solution. And one point that cannot be made enough in our hyper-polarized political environment is that increased income inequality, if it is real, is not the result of the Bush tax cuts. To appreciate that, look at this next chart that I constructed using data from the Tax Policy Center:

I like this graph. First, it illustrates the progressive nature of our tax code. That is, the less you make, the higher the percentage of your earned income that you keep. The lowest 20% now keep 95% of what they make. The richest 20% keep only 75% or so. In other words, the tax code is progressive. Also, you can see that everyone benefited from the Bush tax cuts. The poorest 20% have never kept such a high percentage of what they earned. The second poorest quintile is also doing very well in this regard. Thus, increased income inequality is not occurring because of the Bush tax cuts no matter how much you want that to be true. If you doubt that, remember what incomes for the rich looked like during the Clinton years. The rich were more heavily taxed while he was in office, but their incomes skyrocketed anyway.
When the stock market is doing well, the rich are going to benefit disproportionately. That's what happened during the Clinton years, and my guess is that it is happening again now. Whatever the reason for the increasing income inequality, it has little or nothing to do with tax policy (including the Bush tax cuts that supposedly only benefit the wealthy). That's the point to keep in mind as you try to decide what, if anything, should be done to address this issue.
So, incomes for the poor have remained steady for years, whereas incomes for those who make more have been steadily increasing (more so the more you make). Keep in mind that although incomes for the poor have remained steady, there is simply no doubt that they have been getting steadily better off over the years anyway. The best example of this (but there are an infinite number of examples) is penicillin: not so long ago, you could not even treat a simple infection, which therefore made it a life-threatening condition. Now, you can buy it for next to nothing, which means that an infection is easily treated even if you are poor and have no health insurance.
The liberal mind wants to address income inequality with a sledge hammer: raise the minimum wage to bring up the bottom and tax the rich to bring down the top. The reflexive mindlessness of that approach bodes poorly for its ultimate success, unless it induces a recession that brings us back to where Europe is now (and to where America was 20 years ago). But income inequality is an issue worth thinking about, and if a creative solution comes to my attention (one that might actually address the problem without making everyone worse off), I'll let you know.






































