Investopedia defines the Bell-Shaped Curve as: "The most common type of distribution for a variable. The term Bell Curve comes from the fact that the graph used to depict a normal distribution consists of a bell-shaped line. The highest point in the curve, or the top of the bell, represents the most probable event. All possible occurrences are equally distributed around the most probable event, which creates a downward-sloping line on each side of the peak."
In a democratic society with a healthy market economy, we would expect to see most of the people earning approximately the middle income. So our Bell-Shaped Curve would show that middle income is the most frequently occurring income and most incomes surround the middle. Most incomes fit under the domed part of the bell.
In an ideal Bell-Shaped Curve, shown below, the most normal income distribution expected, the closer we get to the middle income, the more people earn it: Both above and below. And, the further we get from the middle income, the fewer people earn it: So the fewest number of people are very poor or very rich.
According to the IRS, in 2010, the U.S. income distribution, presented as number of personal income tax returns by income range, of all Americans was not a Bell-Shaped Curve -- quite far from it. The chart from the IRS below shows the share of personal income tax returns by income group. It shows an income distribution skewed heavily towards the lower income groups. In 2010, extremely few earned high incomes, the largest percentage was in the middle income region, and nearly an equally large number of Americans earned low incomes. As the trend line indicates, this reflects an economy with a bulging low-income population.
The appropriate economic policies for a democratic society with a healthy market economy would be those that greatly reduce the number of people at the low income side of the curve -- moving them into the middle class "dome of the bell" -- and greatly the number of people at the high income side of the curve, so we move towards a normal income distribution and evolve the society more democratic and economy more healthy: A Bell-Shaped Curve.
Charts below from the IRS, show U.S. income distribution, based on number of income tax returns at income ranges in the 2 years prior to 2008 Wall Street Crash ... and that there was NO Bell-Shaped Curve even distribution of income. In fact, distribution of income was even worse when U.S. economy was humming along.
The Chart below compares number of IRS individual income tax returns filed in 1985, 2006, and 2007. The U.S. dollar inflation calculator estimates that $1 in 1985 would be worth nearly double in 2006 and 2007. (Inflation 1985-2006 totaled 87.4% and inflation 1985-2007 totaled 92.7%.)
This impacts the chart below by explaining the decrease in number of tax returns by those earning incomes under $10,000: Noted inflation of 87.4-92.7% would have pushed most of them into the $10,000 to < $30,000 income range. Half as many of individuals in that range would be pushed up into $30,000 to < $50,000. But the yet higher income ranges are much wider, hence less influenced by the inflation.
Therefore, this chart below shows increase in constant dollars among upper income ranges while the lower and middle remained mainly unchanged.
This final chart, below, shows U.S. median income in constant dollars (all adjusted to 1975 dollars) since the end of World War II as it actually rose and, the dotted line, as it would have risen if the median income rose at the same rate as GDP.
Notice that median income and per capita GDP rose in proportion until the late 1970's, when median income grew at a far slower, lower rate than per capita GDP rose. During the period discussed above, 1985-2007, the divergence in growth rate worsened.
All in 1975 constant dollars: Median income was approximately $50,000. It rose to approximately $60,000 by 2007, but could have risen to approximately $90,000 if median income growth had kept pace with per capita GDP growth. Median income grew by 20% during this period, but could have grown by 80% during this period.
This chart also indicates that, historically, the U.S. bell-shaped curve shift to today's non-bell-shaped curve began approximately in 1970-1980.
Also starting approximately at that time were financial deregulation, repealing or not enforcing workplace conditions rules, and significantly lowering the tax rates on the upper end of the income population.
Does a rising tide lifts all boats ... and do so proportionately at about the same percentage? Well, it depends upon having a fair playing field. Clearly, tax policy, workplace conditions rules, and financial transaction regulations seem to significantly influence which boats rise.
by Steve Reichenstein
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