NCPA - National Center for Policy Analysis


July 20, 2009

In a new study, economists Jonathan Parker and Annette Vissing-Jorgensen of Northwestern University find that -- contrary to conventional wisdom -- income losses in recessions are proportionately greater for the well-to-do than for middle-income households. 

  • By their estimates, the relative income loss for the top 10 percent of the population is 26 percent larger than for the average household.
  • For the top 1 percent, the contrast is even starker.
  • Their proportionate loss is more than double -- that is, if the average household had an income loss of 10 percent, the top 1 percent would lose more than 20 percent.

"Trickle-down economics" is a despised phrase and concept to many, but it also embodies a harsh reality: The rich often play a pivotal role in U.S. economic growth, and if they are enfeebled, then the consequences are widespread, says columnist Robert J. Samuelson.   Consider:

  • Consumption spending, the economy's main engine, is skewed toward the upper classes, because they have most of the income.
  • In 2009, households with more than $200,000 in income account for 3.4 percent of the total but will generate almost 14 percent of consumer spending, estimates economist Sterne.
  • Households with incomes between $100,000 and $200,000 represent about 14 percent of the population and 34 percent of spending.
  • Together, these groups generate nearly half of U.S. consumption, although they're only a sixth of the population.

Similarly, the rich pay most of the taxes, says Samuelson:

  • In 2006, the richest 1 percent paid 28 percent of all federal taxes, estimates the Congressional Budget Office (CBO).
  • The richest 10 percent (including the top 1 percent) paid 55 percent.
  • The system is progressive -- that is, the richer people get, the more of their income they pay in taxes; in 2006, the effective rate for the top 1 percent was 31 percent, reflecting all federal taxes.
  • By contrast, the poorest fifth paid an effective rate of 4 percent (state and local taxes are less progressive, because they rely more heavily on regressive sales taxes).

Source: Robert J. Samuelson, "How the Mighty have Fallen," Newsweek, July 11, 2009.

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