The Rich Take A Pay Cut

By Lisa Smith | October 13, 2009 AAA
The Rich Take A Pay Cut

For the past three decades, the rich have gotten richer. The top 1% of American families - those earning in the neighborhood of $400,000 per year or more - raked in 23.5% of all income while the middle class got smaller and the poor stayed poor. While the middle class and the poor aren't likely to see their situations improve anytime soon, the recession is having an impact on the dynamics of wealth distribution. By 2010, the slice of the pie that goes to the rich may fall to somewhere in the 15-19% range. (For a closer look at this trend, check out our article: Losing The Middle Class.)

Cuts from the Top
Some of that decline comes at the very top, with CEOs seeing their average total compensation fall 6% in 2008, dipping down to $10.4 million from the prior year's $11.07 million. Outsized paychecks on Wall Street have also become fewer in number, as failing firms, mergers, and massive layoffs have taken a bite out of the white truffle crowd.

The decline in the stock market has also had a disproportionably large impact on the rich. Since they own the greatest percentage of the stock, they have suffered the most when stock prices collapsed. Those sitting in the top 20% of wealth holders also took big hits from the decline in real estate values. As a result, they are buying fewer luxury goods, luxury cars, luxury vacations and luxury homes. To put the pullback in buying into perspective, we're not talking about the kind of cars you find in most neighborhood automobile showrooms, but rather the $340,000 handmade Bentley.

Expiring Tax Cuts
In 2011, the rich are poised to take another hit, as the tax cuts put in place by George W. Bush are set to expire. Since the nation's dire financial straights are currently being subsidized by the federal government courtesy of taxpayer-funded bailout programs, the increased tax revenues will be a much needed source of income for the government's coffers. Those at the top end of the income scale will see their income tax rates rise from 33% or 35% to 36% or 39.6%. The revival of the estate tax will also take a big bite of the affluent's pie, as estates in excess of $1 million will be hit with taxes that start at 37% and rise to 55%.

Rich Remain Rich
So where does all this wealth reduction leave the rich? Still rich. Looking backward, for more than three decades after World War II, the top 1% of American families earned 13% of the nation's pre-tax income versus 23.9% before the War. Even at the low end estimate of 15% of all income, they'll still be doing fine and won't have to drive a Chevrolet, take a public bus or vacation at Disneyland anytime soon. (For more perspective on who has the money and who doesn't, read The Gini Index: Measuring Income Distribution.)

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