Income inequality—the extent to which income is distributed unevenly—is widespread and growing in North Carolina, according to a recent report by the Budget and Tax Center. In a free market economy, a certain level of inequality is to be expected. However, we are experiencing historically high levels of income inequality—levels that are limiting and eroding the equality of opportunity, a core tenet of the American Dream.
Research shows that 42 percent of Americans born into the bottom fifth of the income distribution remain there as adults. This means that one’s financial standing as an adult is largely dependent upon their parents’ financial standing. This is certainly problematic considering 1 in 4 of North Carolina’s children live in poverty. More troubling, the average North Carolinian experiences lower-levels of absolute and upward mobility compared to the average Southeasterner and American.
Growing income inequality limits economic mobility—not to mention stymies long-term, rapid growth. To paraphrase Isabel Sawhill, a Brookings Institution’s expert on economic mobility, climbing the income ladder becomes more difficult as each step on the ladder grows farther apart. So, how widespread is income inequality in North Carolina?
Census data show that a wide income gap exists in North Carolina, with the top and bottom fifth of the income distribution separated, on average, by an annual income of $144,246. Income inequality is also growing. Each fifth of the income tier has experienced shrinking household incomes since 2007, but none more so than the households in the bottom fifth (see chart below). For the average household in the bottom fifth, income dropped by 10.4 percent between 2007 and 2011, compared to 9.2 percent and 6.4 for the average household in the middle fifth and top fifth, respectively.
The top fifth of households held more income than the bottom 80 percent (lowest 4-fifths) of households combined in 2011. The top 5 percent of households’ average income is more than 26 times as large as the average income of the entire bottom fifth and 6 times as large as the income of the middle fifth.
Growing inequality is not inevitable. As my colleague noted yesterday, the increasing inequality of earnings is a major driver behind income inequality in our state. The tax code is another major driver behind growing income equality, according to a report released by the Congressional Research Service. Check back Friday for more on the connection between taxes and income inequality.
As the American Dream slips out of reach for many North Carolinians, it is critical for policymakers to rebuild economic opportunity and shared prosperity for all of the state’s residents. One effective way to reduce income inequality and encourage economic growth is to reduce the gap between work and compensation by creating good, quality jobs. Other policies that enable and promote opportunities—such as tax credits for low?income families and high-quality schools and job training programs—are also needed to offset the state’s high income inequality and low economic mobility.
Let’s invest in North Carolinians so everyone has the opportunity to live up to their potential.