RALEIGH – Commentators from the “Two Americas” school of income-inequality populism look out across the economy and see only gloom and doom. Then they fume. But in presenting an accurate picture of what is going on, both their choice of data and their common sense are often unequal to the task.
Here in North Carolina, my JLF colleagues and I have pointed out that claims about large numbers of families living perpetually below a “living wage” are incoherent and inconsistent with reality. At the national level, allegations of a widening gap between rich and poor – with the middle class “disappearing” thanks to excessive capitalism and recessive unionism – frequently draw their rhetorical power from the use of income data sets reported by the Internal Revenue Service. Economist Alan Reynolds just spent several years researching the issue for a new book, Income and Wealth, and has a lot to say about the misuse and misunderstanding of the IRS data.
Perhaps the most damning indictment Reynolds offers is that simplistic analysis of personal tax data over spanning the past two decades fails to account for the role that tax reform played in shifting income receipts from corporate tax forms to individual ones. Since corporate taxation is only a redundant means of collecting taxes from individuals – be they shareholders, workers, or employees – any sensible study of income trends would have to take into account shifts between corporate and individual tax filings motivated by changes in the tax treatment of capital gains, dividends, stock options, and other financial transactions.
Other problems with the commonly cited data on income inequality include:
• Leaving out annual changes in value of tax-deferred investment vehicles such as IRAs and 401(k)s, ownership of which has exploded among the middle-class since the early 1980s.
• Leaving out the value of government transfer payments, tax credits, and in-kind assistance offered to the poor. While sometimes you want to measure income without factoring in government’s role, excluding it routinely in the income-inequality debate means that even if government drastically increased its redistributionist schemes, the popularly used statistics would remain unchanged.
• Mixing up the denominator of the income-share fractions – is it individuals, households, or “tax units”? It makes a big difference.
• Ignoring changes in the propensity of taxpayers at various levels to report their incomes, which is related to changes in tax law, welfare eligibility, and other policies.
These are complex issues, which Reynolds discusses in some detail. As a bottom line, consider these two points. First, when he adjusted for just two factors – government transfer payments and what amounts to bookkeeping effects from past tax reforms – Reynolds found “no increase in the top 1 percent’s income share between 1988 and 2003.” The 2004 numbers do show a spike in the wealthiest Americans’ income share, but this could well be a statistical artifact resulting from corporations’ increased use of dividends after the federal tax legislation of 2003.
Second, inflation-adjusted pretax income of U.S. households has gone up at all level of the income distribution since 1989. The bottom quintile received a 21 percent gain. The top quintile received nearly a 21 percent gain. Adding in the value of non-wage benefits, which have grown significantly as a share of total income, would likely change this picture somewhat, but mostly by increasing the income gain of middle-income Americans. In short, Reynolds writes, there is “surprisingly little U.S. evidence of any significant and sustained increase in inequality of income, wealth, wages, or consumption since the late 1980s.”
Reynolds makes a good statistical case that we should smell a rat here. But he shouldn’t have had to. Another telling aroma should have been the blatant mismatch between populist claims about destitution and middle-class deterioration on the one hand and visible reality on the other. Someone has been buying all those starter homes, cars, inexpensive clothes and furniture, electronic gadgets, take-out meals, cell phones, and medical services. Someone has been founding new churches, taking vacations, joining health clubs, enrolling their kids in sports leagues, and shopping online. The top 1 percent, or 5 percent, or even 25 percent of Americans couldn’t possibly be responsible for all or even much of this.
Yes, the poor are still with us, and we should promote realistic policies for improving their lot, but this is hardly a neo-Dickensian moment. Professional worrywarts and misguided populists should wake up and smell the coffee – now available seemingly on every street corner, steaming hot and of bewildering variety, with Internet service available. The clientele ain’t robber barons.
Hood is president of the John Locke Foundation.