Income inequality in the United States has been rising for decades. As I’m sure many of you know, the best source for data on income inequality is Piketty and Saez. The pictures below (which I’m shamelessly stealing from Piketty and Saez) give you a pretty good sense of the problem. 
Today, the top 10 percent of income earners take home roughly half of all pre-tax income earned in a year. Inequality was really high in the first 40 years of the twentieth century but then fell sharply and remained low for the next 30 years. Then, sometime around 1970, income inequality began rising gradually. This basic pattern holds essentially regardless of how you define the top income earners. This figure shows the dreaded top 1 percent of income earners.
Keep the magnitude of these figures in mind. The top 1 percent claims almost 25 percent of all income. The top 0.1 percent is even more striking. They take home more than 10 percent of all income. That is, these households earn essentially 100 times what the average household earns in a year.
The source of this income is also noteworthy. The graph below decomposes the top 0.1 percent according to the source of the income. Clearly a lot of the increase in income inequality is due to wage income. In the past, the ultra-rich were the owners. This isn’t entirely true today. Many households in this group are rich because of extraordinary labor income. (Many CEOs are compensated for the “work” they do rather than their ownership stake in the company.)
I submit to you that this state of affairs is simply unacceptable. This current degree of income inequality is probably the most disruptive, most corrosive and most troubling problem confronting the U.S. economy today. Even if inequality is a “natural” consequence of market based economies it doesn’t mean that we should tolerate it. (Bee-stings and allergies are also natural but you don’t just stand there and do nothing while your friend goes into anaphylactic shock.) I only need to watch 10 min of the Real Housewives of Orange County before I become convinced that we are really in dire need of aggressive income redistribution. It would be nice to see someone make a reality show called The Real Housewives of Gary Indiana; or the Real Housewives of Flint Michigan; or the Real Housewives of Allentown Pennsylvania.
In the past some hard-core economists might respond to inequality by saying that we can’t make meaningful comparisons across people because utility is only an ordinal concept. This response is totally unpersuasive to non-economists – and the non-economists are right. Empathy is a very real human trait and it is completely reasonable to desire a more even distribution of income for its own sake. (Perhaps utility has a cardinal component to it after all.) The challenge for economists and policy makers is to propose policies which effectively redistribute income to produce a more tolerable distribution of well-being while at the same time causing the least amount of damage to markets and incentives. This is a challenge for both Republicans and Democrats.
Republicans need to come to the realization that extraordinary income inequality is real and it’s a huge problem. A very cynical view might be that we have to deal with it because not dealing with it, courts a populist movement which could usher in a wave of really bad economic policies (think about a maximum wage policy or something similar). But the correct view is this: it’s a huge problem because none of us (even the most stoic Republican out there) wants to live in a country where we have people living in obscene opulence while at the same time, just a few miles away, we have people living in obscene poverty – the kind of poverty where basic health needs becomes an issue; the kind of poverty where food and heat become luxuries. We aren’t dealing with this problem and we need to. It’s as simple as that.
For Democrats, the challenge is realizing that the distorting problems of taxation and careless redistribution are real and must be properly confronted by policy makers. We need to come up with aggressive policies (policies which make meaningful progress on inequality) but that don’t cause huge market inefficiencies. These policies are not necessarily going to be politically popular and there are many ways of screwing things up if we don’t think carefully about how best to achieve our goals. The recent article by the Harvard economist Sendhil Mullainathan is exactly right and every well-meaning liberal should take a moment to internalize these ideas. Incomes in the United States really are substantially higher than incomes in Europe and it’s no accident. (If you are a Democrat and you are thinking that the first thing we need to do is raise the minimum wage, you are confused.) I suspect that many liberal concerns about market failures are really just stand-in’s for a concern about inequality. If income were very evenly distributed, would people really care about “predatory lending.”
 These figures all correspond to pre-tax income for individual tax units. After-tax measures will undoubtedly be better. In addition, the composition of the households will also matter. Joint filers will typically have more income than a single filer though this doesn’t really reflect income inequality. Correcting for these factors is important but it’s not going to undo the stark reality which is behind these figures.