<Standard E.2.4 .................................................................................................................................................................Standard E.2.6>

Explain the function of profit in a market economy as an incentive for entrepreneurs to accept the risks of business failure.

John D. Rockefeller in 1917 by John Singer Sargent
John D. Rockefeller in 1917 by John Singer Sargent

Focus Question: What are the roles of risk, profit, income, wealth and taxes in the American economy?

Topics on the Page
  • What is Profit?
  • Wealth, Income and Power in American Society
    • Wealthiest Americans
    • Risk in a Capitalist Economy
    • Who are the Top 1 Percent?
    • Racial Wealth Gap
    • Financial Inequality in Massachusetts
  • The Role of Taxes
    • The 16th Amendment and the Income Tax

What is Profit?

Profits come from investments made by individuals, companies and governments that make possible the production of goods and service that people want to purchase.

Screen Shot 2016-02-13 at 11.47.54 AM.pngFor a view of the function of profits, read Profits in a Capitalist Economy—Where Do They Come From, Where Do They Go? from Philip Pilkington's blog, The Naked Capitalist.

rotating gif.gifFor background, see United States History II.1 on the roles of business leaders and entrepreneurs in the Glided Age.

Wealth, Income and Power in American Society

What is the difference between wealth and income?
  • Wealth is what you own minus what you owe and income is money that flows in.

external image Red_apple.jpg11 Things the Wealthiest Americans Can Buy for the U.S.

Hetty Green, 1900, richest woman in America
Hetty Green, 1900, richest woman in America

Screen Shot 2016-02-13 at 11.47.54 AM.png
The Wealthiest Americans Ever from The New York Times (information as of 2007). John D. Rockefeller is the wealthiest person in United States history.

The Wealthiest Man Ever was Mansa Musa of Mali.

Multimedia.pngSee also Wealth Inequality in Americaon YouTube (authored by Politizane) that shows what Americans think wealth inequality looks like, what they think is ideal, and what it actually is (top 20% own 84 %).

29 Richest People in America (January 2016)
  • Bill Gates and Warren Buffett lead the list

Highest-Paid Athletes (2012).. Boxer Floyd Mayweather made 85 million between June 2011 and June 2012; Tiger Woods and Lebron James made nearly 60 million between winnings and sponsor deals.

Fortune 500 Annual Ranking of America's Largest Corporations (2012)

100 Highest-Paid CEOs(2012) from Executive Pay Watch from the AFL/CIO.
  • CEOs from largest American corporations are paid 354 times what the average worker makes in salary.
  • CEOs on average earned $12.3 million compared to $34,645 for average private-sector worker.

game_icon.svg.pngFor more, explore Executive Paywatch: CEO Pay and You


Multimedia.pngHow Incentives Affect Innovation

external image Fig6_Potential_profit_archetypes.jpg
The chance of things not turning out as expected. Risk taking lies at the heart of capitalism and is responsible for a large part of the growth of an economy.

*In general, economists assume that people are willing to be exposed to increased risks only if, on, average they can expect to earn higher returns than if they had less exposure to risk.

Who are the 1 Percent?

Bill Gates, 2006
Bill Gates, 2006

From World War II to the 1980s, noted former Secretary of Labor Robert Reich, "the richest 1 percent of Americans received only about 9 percent of the nation's total income."

Since then however, their has been a substantial income redistribution in favor of wealthy Americans.

"From 9 percent in 1980, the top 1 percent's take has increased from 23.5 percent in 2007. CEOs who in the 1970s took home 40 times the compensation of average workers now rake in 350 times. . . the 25 best-paid hedge-fund managers took in an average of $1 billion each. (Their marginal income tax, by the way, was barely over 17 percent, while the typical family paid a marginal tax far higher)."
"Confessions of a Class Worrier," Robert Reich, Valley Advocate, August 19, 2010.

The top 1 percent?
  • 1.4 million families who made an average of one million dollars in 2009 are the top 1 percent.
  • Their share of the nation's total adjusted gross income was 17 percent in 2009. Those people are earning more than the entire bottom half of the population.
  • Since the mid-1980s, the top 10 percent has increased their share at the expense of the rest of the population. The greatest gains have been by the richest 1 percent, with half of those gains going to the top 0.1 percent.
  • Financiers--bankers, fund managers and other money professionals--are just 14 percent of taxpayers at the top of income distribution, but their share has been growing dramatically to the point where it is almost equal that of doctors and lawyers combined. ("Wall Street Protesters Hit the Bull's-Eye," The New York Times, October 30, 2011, p. 10).

The Racial Wealth Gap
multicultural.pngThe Faces of American Power: Nearly as White as the Oscar Nominees from The New York Times (February 28, 2016)
  • This website looks at 503 of the most powerful people in government, education and business and found just 43 are minorities.
  • Click here to see an article about the widening racial wealth gap in the United States.

Screen Shot 2016-04-21 at 9.41.38 AM.pngFinancial Inequality in Massachusetts
  • Top 1 percent of incomes earn an average of $537,100 in 2009 (up from $234,752 in 1979, a gain of 128.8%).
  • Those without a high school diploma earn an average of $36,081 (down from $54,564 in 1979, a loss of 34%).
  • Sherborn, the state's wealthiest community had an median 2009 income of $186,058 in 2009 with a 4.5% unemployment rate.
  • Springfield, one of the state's poorest cities, had an median 2009 income of $41,476 in 2009 with a 11% unemployment rate. "Worlds Apart," Boston Sunday Globe, December 18, 2011.

Wealth, Income and Power by sociologist G. William Domhoff presents historical information on income distribution in American society.

game_icon.svg.pngSpent, an online game from the Urban Ministries of Durham puts players in the role of a single parent who must make choices to survive a month on a limited income.

Role of Taxes in American Society

Average income taxes by country in year 2005.
Average income taxes by country in year 2005.

History of the U. S. Tax System from the Department of the Treasury.

In 2010, the National Archives released a Treasury Department report from the1940s that showed wealthy Americans paid a much higher proportion of the income in taxes than they do at the present time.
  • In 1941, Americans in the top income bracket paid up to 81 percent in taxes.
  • As World War II continued, the rate rose to 94 percent by 1944 and 1945.
  • During the Korean War, the top rate was 91 percent
  • It fell to a low of 28 percent during the Reagan presidency, rising to 39.6 percent under Presidents Clinton and Bush I.
  • In 2010, the Congress extended the Bush II-era tax cuts, keeping the top rate at 35 percent. (Taxes: What History Tells Us, Stephanie Kraft, Valley Advocate, December 16, 2010, p.8.)

Where do our federal tax dollars go? from the Center on Budget and Policy Priorities
  • In the fiscal year 2015, the US government spent 3.7 trillion dollars, which amounts to 21% of the nations Gross Domestic Product or GDP.
  • 24%(888 billion dollars) of this 3.7 trillion paid for Social Security which provided monthly benefits averaging 1,342 dollars to retired workers and their families.
  • 25%(938 billion dollars) went towards funding primarily Medicare and Medicaid, which provides health coverage to the elderly and poor.
  • 16%(602 billion dollars) went towards defense and international security assistance. Transportation infrastructure, education, and science/medical research are woefully unsupported by federal tax dollars.
primary_sources.PNG16th Amendment to the Constitution established the right of Congress to impose an income tax.

Map of the United States showing in red states that have no state income tax as of July, 2005.
Map of the United States showing in red states that have no state income tax as of July, 2005.

external image 500px-Map_of_USA_highlighting_states_with_no_income_tax.svg.png

Works Cited:
Economics A-Z http://www.economist.com/research/economics/alphabetic.cfm?letter=R#risk