Income Inequality Most Apparent In Blue States Of New York, California, Illinois, Massachusetts and Washington D.C.. Why Don't They Fix Their Backyard First?

Where Income Inequality Is Worst

With President Barack Obama calling income inequality "the defining challenge of our time," much attention has been focused on the topic of late.

But the deepest level of income inequality in America is in one of the country's bluest states.

"The most profound level of inequality and bifurcated class structure can be found in the densest and most influential urban environment in North America — Manhattan," writes Joel Kotkin, executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University.

In 1980, Manhattan (New York County) ranked 17th among U.S. counties in income inequality. It is now the worst among the nation's largest counties.

The most commonly used measure of inequality is the Gini index, developed by Italian statistician Corrado Gini. It ranges between zero, which would be complete equality (everyone in a community has the same income) and one, which is complete inequality (one person has all the income). Manhattan's Gini index was at 0.596 in 2012, higher than South Africa's index before apartheid ended.

If Manhattan were a country, it would rank sixth highest in income inequality out of 130 nations, according to Kotkin.

In 2009, New York's richest 1 percent earned one-third of the entire city's personal income — nearly twice the proportion for the rest of the nation.

A recent Brookings Institution study found that the big cities with the most pronounced levels of inequality are those with the highest costs: New York, San Francisco, Boston, Miami, Los Angeles, Oakland, Chicago, and Washington, D.C.

One factor fueling urban inequality is the federal tax code regarding home ownership, which helps upper-income Americans the most, according to a Washington Post editorial by Charles Lane.

Tax deductions for mortgage interest are projected to cost the Treasury $70 billion in fiscal 2014, while property tax deductions will cost $31 billion. Home-sale capital gains up to $500,000 are also tax free, and they will likely cost the Treasury $52 billion this year.

About 73 percent of mortgage-interest deductions go to the top 20 percent of earners, and 30 percent go to the top 1 percent, according to Lane.

Yet most lower-income earners don't take advantage of the deduction because they don't earn enough to itemize deductions on their federal returns.

Some of the country's worst inequality can also be found in rural areas, according to a study by University of Washington geographer Richard Morrill cited by Kotkin.

The worst rural inequality is likely in the agricultural areas of California.

"The Golden State is now home to 111 billionaires, by far the most of any state," Kotkin writes in an article that first appeared at Forbes.com. "California billionaires personally hold assets worth $485 billion, more than the entire GDP of all but 24 countries in the world."

Yet California has the highest poverty rate in the country, adjusted for housing costs. As of 2012, with about 12 percent of the U.S. population, California accounted for one-third of the country's welfare recipients.