” height=”159″ />Yesterday I received a phone call from a gentleman who wanted my thoughts on income inequality. He had read a couple of left-leaning publications based on Census data on how bad income disparities have become in the United States, and their devastating effect on the economy. Like a three day old meatloaf, he brought forth the usual proclamations about income inequality and served them up on a plate for me to pick at, including the following:
“The rich are getting richer and the poor are getting poorer.”
“The United States is no longer an economically mobile society.”
“Income inequality wreaks havoc on the economy.”
Then he asked me what the solution should be to solving income inequality. This is akin to asking a person, “So when did you stop beating your wife?”
I answered his question with a question of my own: What is the purpose of measuring income inequality and do we need to eliminate it. In order to decide whether something is good or bad and whether to “fix” it, we must know what problem we are trying to solve.
In solely comparing the wage income of the bottom 20 percent of earners to the top 20 percent of earners, it tells us nothing about the general welfare of people. Why? For many reasons:
- Reported income does not include the value of transfer benefits received by the poor, including Medicaid, food stamps, education grants, cash assistance and subsidized housing.
- Reported income is just that – reported income, and does not include unreported income from the underground economy, income from illegal activities and barter trades.
- Reported income does not include employer-provided benefits, such as health insurance, that carry an implicit value.
Finally, the notion that people are “stuck” in their income quintile and will never rise out of it is simply false. Census data shows that individuals who are in a lower income quintile at one point in time typically move up during the next Census. For example:
- Between 1996 and 2005, 58 percent of the lowest quintile households had moved to a higher quintile by 2006.
- In 1996,
more than 57 percent of the top 1 percent fell out of that category by 2006.
- A Pew study found that two-thirds of today’s 40-year olds are in a higher income quintile than their parents (even when adjusted for the cost of living).
Add to that the fact that the income tax burden for at least half the population fell markedly over the past 25 years, but rose for the wealthiest.
- In 1986, the bottom 50 percent paid about 6.5 percent of all federal income taxes. They now pay less than 3 percent.
- The top 1 percent pay nearly pay nearly 40 percent of all federal income taxes, up from 36 percent in 1986.
The bottom line is proponents of radical income redistribution (achieved usually through higher taxes and expanded government programs) often use income inequality numbers as the foundation for
their solution. But there are better ways to improve people’s lives; namely, by removing barriers to engaging in the free market and allowing them to grow their income.
By the way, the meatloaf was cold.