Brian Rogel

Income Inequality Influences the US Personal Savings Rate

Chart: Source

Income inequality describes how income is distributed across the various participants within a society. High income inequality is a leading factor in a wide distribution of wealth. It’s also one of the major problems causing our current economic crisis.

Personal Savings Rate

Chart: Source

The chart above illustrates the personal savings rate within the United States. Notice the distinct shift that occurs in 1982.

The years 1980-1982 mark a turning point in the economy. Below you’ll find two graphs created to explain what exactly began this downward trend.

The Connection Between Income Inequality and Personal Savings

In the early 1980’s there was a very large tax cut. The top marginal* tax rates were simultaneously dropped to levels neither had seen since the great depression.

(*The term “marginal” means the rate a person pays on their last unit of money earned. The income earned before that point is taxed at a lower percentage. The top marginal rate is simply the highest amount any person can be taxed.)

This decrease in top marginal taxes led to the immediate spike in wealth for the top 1%. The vast increase in wealth for the 1% then pulled money away from the bottom 99% which inevitably lead to a drop in national savings.

In order to truly get an understanding of the connection between income disparity and US savings, the savings graph can be flipped upside down. The closer the income disparity graph and the personal savings graph align, the higher the correlation.

It can be concluded from the above charts that a strong correlation exists between income disparity and personal savings within the United States.