Report on US Income Inequality and its Implications for Sustainable Development Goals

An analysis of recent economic research reveals a significant and sustained increase in income inequality within the United States. This trend presents a direct challenge to the achievement of the United Nations Sustainable Development Goals (SDGs), particularly SDG 10 (Reduced Inequalities). The report outlines the complexities in measuring income, identifies the primary drivers of this growing disparity, and examines policy options that align with the broader 2030 Agenda for Sustainable Development.

Defining and Measuring Income: A Foundational Challenge for SDG 10

Accurately measuring income inequality is fundamental to designing effective policies. A primary challenge lies in the definition of income, which economists approach in several ways, each with different implications for assessing progress toward SDG 10.

Core Income Categories

• Labor Income: Comprises wages, salaries, and bonuses. This form of income is relatively straightforward to measure.
• Capital Income: Includes all earnings from asset ownership, such as dividends, interest, and rent. The measurement of capital income is complex and a major point of contention in inequality research.

Methodological Approaches to Capital Income

1. Distributed Income: This is the most minimal definition, counting only the direct cash flows an individual receives from assets, such as dividends and interest payments.
2. Factor Income: A broader concept used in national accounts that includes not only distributed income but also retained earnings—profits that companies reinvest rather than pay out to shareholders. This method acknowledges that wealth grows even without direct cash distribution.
3. Haig-Simons Income: This comprehensive definition includes all changes in wealth, capturing increases in asset values from capital gains. While it offers a complete picture of wealth accumulation, it can be volatile and may not always reflect real increases in future cash-generating capacity.

Key Findings on US Income Inequality Trends

Regardless of the specific income definition used, research confirms a clear trend of rising inequality, which undermines the principles of SDG 10 and has cascading effects on SDG 1 (No Poverty) and SDG 8 (Decent Work and Economic Growth).

The Unmistakable Rise in Top-Tier Income Concentration

• There is a strong consensus among researchers that the pre-tax income share of the wealthiest households, particularly the top 1% and top 0.01%, has increased dramatically since the 1980s.
• This concentration of income at the very top is a direct contradiction to the objective of SDG 10.1, which aims to sustain income growth for the bottom 40% of the population at a rate higher than the national average.

The Drivers of Widening Disparities

• The rise in overall inequality is not primarily driven by a shift from labor’s share of income to capital’s share.
• Instead, the increase is overwhelmingly caused by rising inequality within both labor and capital income groups. Certain workers and certain capitalists are pulling far ahead of others in their respective categories.
• From 1980-2000: The rise in the top 1% income share was mostly driven by increasing inequality in labor income.
• Post-2000: The continued rise in the top 1% income share has been entirely driven by an increase in capital income inequality. For the top 0.01%, rising capital income inequality has been the dominant factor for the entire period since 1980.
• This trend is largely attributable to the fact that top entrepreneurs and business owners today can accumulate wealth at a significantly faster rate than in previous decades.

Policy Levers for Advancing SDG 10: Reduced Inequalities

Addressing this inequality requires a multi-faceted policy approach that considers fiscal measures and structural market reforms, aligning with SDG 10.4 (adopt policies, especially fiscal, wage and social protection policies) and SDG 16 (Peace, Justice and Strong Institutions).

Fiscal Policy Interventions

• Tax Reforms: Proposals include closing tax loopholes for passthrough businesses, implementing more systematic taxation of retained earnings, and reforming capital gains taxes.
• Growth Tradeoff: A key concern with these policies is the potential tradeoff between reducing inequality and hindering economic growth, a central theme of SDG 8. High taxes on productive entrepreneurs could disincentivize innovation and business creation.

Structural Reforms for a More Equitable and Competitive Market

• Promoting Competition: When a small number of firms consistently earn high returns while new competitors struggle to enter, it signals a potential breakdown in market competition. This dynamic exacerbates inequality.
• Policy Actions: Strengthening antitrust enforcement, removing bottlenecks to market entry, and lowering barriers for starting new businesses are critical.
• Synergistic Benefits: Such policies can simultaneously advance multiple SDGs. By fostering a more competitive economy, they can reduce inequality (SDG 10), boost economic efficiency and entrepreneurship (SDG 8, SDG 9: Industry, Innovation and Infrastructure), and build more inclusive institutions (SDG 16).

Which SDGs are addressed or connected to the issues highlighted in the article?

1. SDG 10: Reduced Inequalities

   • The entire article is centered on the issue of income inequality in the United States. It directly discusses the measurement, causes, and trends of the gap between the wealthiest individuals and the rest of the population. The text states, “Just how much inequality has increased and why it is growing is a topic of debate among economists,” and “most of the rise in income inequality is really driven by a rise of inequality among workers and among capitalists.” This aligns perfectly with the core objective of SDG 10.

2. SDG 8: Decent Work and Economic Growth

   • The article connects income inequality to broader economic structures, including the roles of labor and capital, entrepreneurship, and economic efficiency. It discusses the “labor share of income,” the productivity of entrepreneurs, and how policies promoting competition can “jointly decrease inequality and also boost economic efficiency.” This links the issue of inequality to the goal of achieving sustainable and productive economic growth.

What specific targets under those SDGs can be identified based on the article’s content?

1. Target 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40 per cent of the population at a rate higher than the national average.

   • Although the article focuses on the top earners, it does so to illustrate the widening gap in income distribution. The discussion of the top 1% and 0.01% pulling “far ahead of others” implicitly addresses the relative income growth of the rest of the population. The finding that “the average income share of the top 0.01 percent has been multiplied by four” since 1980 highlights the failure to achieve balanced income growth, which is the essence of Target 10.1.

2. Target 10.4: Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality.

   • The article explicitly discusses policy levers to address inequality. It mentions that “a lot of the debate has focused on the fiscal side, i.e., changing the tax rates,” including “taxing retained earnings a little bit more systematically, or revisiting how we treat capital gains.” It also proposes policies to “improve the market structure,” such as “rethinking antitrust, removing bottlenecks, or lowering entry barriers to start new businesses.” These are direct examples of the fiscal and economic policies mentioned in Target 10.4.

3. Target 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation…

   • The article’s proposed solutions directly relate to this target. The author suggests that beyond taxation, there is “a lot of value in revisiting policies that promote entry and real competition, whether that’s rethinking antitrust, removing bottlenecks, or lowering entry barriers to start new businesses.” This focuses on creating a more competitive and dynamic economy that supports new entrepreneurs, which is a core component of Target 8.3.

Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

1. Income share of top income groups (e.g., top 1% and top 0.01%)

   • This is a primary indicator used throughout the article to demonstrate the scale of inequality. It is explicitly mentioned: “if you look at the top 1 percent, most of the rise in inequality…is basically driven by a rise in labor income inequality” and “if you look at the top 0.01 percent…almost all of it is due to a rise in capital income inequality.” The article also quantifies this, stating, “since 1980, the average income share of the top 0.01 percent has been multiplied by four.” This serves as a direct measure of income concentration.

2. Labor share of income vs. Capital share of income

   • The article discusses this indicator directly when analyzing the drivers of inequality. It notes a “common misunderstanding that people have is that a lot of the rise in inequality is driven by the fact that labor share is declining.” While the author concludes this is not the primary driver of inequality between individuals, the “labor share of income” is a key metric used in the analysis, aligning with official SDG indicator 10.4.1 (Labour share of GDP).

3. Growth rate of income for different groups

   • The article implies this indicator by discussing how the income of top entrepreneurs grows at a faster rate. It states, “you can convert this fourfold increase [in the top 0.01% income share] to an increase in the growth rate of about 6 percentage points per year.” This metric is crucial for tracking progress on Target 10.1, which compares the income growth of the bottom 40% to the national average.

4. Return on capital

   • This is mentioned as a driver of inequality. The article notes that “a lot of the rise in inequality is basically driven by the fact that the return on capital has increased.” Measuring the return on capital can serve as an indicator of how wealth generates further income, which is central to the discussion of capital income inequality.

SDGs, Targets and Indicators

Source: aeaweb.org