You are here

How Small Business Development Addresses Income Inequality

Research shows that the inequality between the residents in low-income communities and those that reside in California's most affluent communities has dramatically increased in the past several decades.  For example, the average inflation-adjusted income of the top 1% of California’s taxpayers increased by 50.2% between 1987 and 2009, from $778,000 to $1.2 million.  In contrast, the average income of taxpayers in each of the bottom four-fifths of the distribution lost purchasing power.  This economic disparity has significant social and economic ramifications for everyone in the state and directly challenges the state's global competitiveness and long-term economic success.

Using Small Business Development to Address Income Disparities

In understanding how business ownership can shift the income disparity dynamic, it may be useful to consider a 2011 Congressional Budget Office (CBO) report on after-tax incomes of American households.  The CBO found that between 1979 and 2007, income for households at the higher end of the income scale rose much more rapidly than income for households in the middle and at the lower end of the income scale.  Most significantly, by the end of the report period (2005 and 2007), the after-tax income received by the top 20% exceeded the after-tax income of the remaining 80%.  The chart below illustrates the CBO's findings in more detail.

 After-Tax Income Growth 1979 to 2007

Income Bracket

Income Earners

Percentile

Percentage Growth

          1
Top 1%
100th
                 275%
          2
Next 20%
81st to 99th
                   65%
          3
Next 60%
20th to 80th
                   40%
         4
Bottom 20%
1 to 19th
                   18%
Source: “Trends in the Distribution of House Income Between 1979 and 2007,″ Congressional Budget Office, 2011

The two primary reasons for the increase in income disparities were the uneven distribution in the sources of household income and the differing economic circumstances of those sources during the 28-year report period.  Households in the higher income brackets (1 & 2) received a majority of their income through capital gains and business income, which as a share of total income increased in value, while individuals in the bottom two brackets (3 & 4) received a majority of their income from labor income and capital income, which decreased in value.  With the recession, this income disparity has continued to increase, in part, because of the impact of long term unemployment on wages, a core component of labor income, and rental rates, a core component of capital income. 

The findings in the report also suggest that policies that inhibit small business development serve to reinforce the income disparities trend and that policies which result in greater access, especially to historically underserved populations, could begin to break the trend.

Summary

Programs like the NMTC program are based on the economic principle that targeting significant incentives to lower income communities allows these communities to more effectively compete for new businesses and retain existing businesses, which results in increased tax revenues, less reliance on social services, and lower public safety costs. Residents and businesses also directly benefit from these more sustainable economic conditions through improved neighborhoods, business expansion, and job creation.

Research on the impact of the federal NMTC Program in available under the tab, Program Evaluations.

Copyright © 2011 State of California