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Income Inequality Revisited

Income Inequality Revisited

| August 14, 2019
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One of my favorite economics blogs,  Mark Perry's Carpe Diem, had a couple posts recently providing further analysis of Bureau of Labor Statistics (BLS) and Census Bureau data regarding household income.

The analysis tends to refute the narrative we hear from politicians.

First are some excerpts from his July 29 post:

“Inequality between high and low income households decreases sharply after adjusting for taxes, household size, earners per household, and consumption."

 

The table and graph above were inspired by Alan Reynold’s recent post on the Cato At Liberty blog “A Different Look at After-Tax Income Inequality.”  Here’s the opening of that post:

“Every presidential candidate promises to “reduce income inequality” by raising tax rates on the rich and increasing transfer payments (including tax credits and in-kind benefits) for the middle class. Yet the widely used flawed data from Thomas Piketty and Emmanuel Saez exclude both taxes and transfers.  Income measures that exclude taxes and transfers cannot tell us whether taxes or transfers are high or low, and cannot be directly affected by higher taxes on some or higher transfers to others (because such policies are ignored in the data).

A simple table adapted from the 2017 Consumer Expenditure Survey, from the Bureau of Labor Statistics, may be sufficient to show how crucial it is to take account of taxes (including refundable tax credits), and also to adjust average income for the different number of people and workers per household.”

Note: The table above is similar to Alan’s, but is based on slightly updated BLS mid-year data for the 3rd quarter of 2017 through the 2nd quarter of 2018 for nearly 131 million consumer units (households) over the most recent year. I’ve also added annual expenditure data (last three rows) to the table above to extend Alan’s analysis. The far-right column shows the ratios of various measures of income, consumer unit characteristics, and expenditures comparing the top quintile (top 20%) to the bottom quintile (bottom 20%). Here’s more of Alan’s post updated with data in the table above:

“The last column shows that the highest 20% earned 17.47 times as much as the lowest 20% before taxes, but only 13.29 times as much after taxes. But simply adjusting household income for taxes is not enough. Average incomes cannot be properly compared between the highest and lowest quintiles because there are nearly two times as many people per consumer unit (household) in the highest 20% (3.1) as there are in the lowest (1.6). And there are more than four times as many workers on average in the highest 20% (2.1) as there are in the lowest 20% (0.50).

By adjusting for different household size, we find the highest 20% earned only 6.9 times as much after-tax income per person as the lowest 20%. But income is likely to be higher in households with two or more workers than it is in households with no workers or only one. So, that last row measures average after-tax income per worker in the highest and lowest quintiles (and those in between). By further adjusting for the different number of earners, the highest 20% earned only 3.2 times per worker ($74,701) as much as the lowest 20%, after taxes ($23,616).

Properly understood, the facts about U.S. after-tax income distribution and growth are insufficiently alarming to justify the political misuse of questionable pretax, pre-transfer income statistics as a false argument for redistributing after-tax income.”

Mr. Perry concludes with: “The bottom chart above shows how the income inequality ratios between the top and bottom quintiles decline from 17.5 to 13.3 times after adjusting for taxes, and from 6.9 to 3.2 times after adjusting after-tax income for the average number of persons and average earners per household.  Further, the consumption inequality ratio between the top and bottom quintiles decreases from 2.3 times for the average spending person to only 1.1 times for the average spending per earner.

In 2013, President Obama called income inequality “the defining challenge of our time” and most of today’s presidential candidates apparently share Obama’s concern and have pledged to address that challenge by various tax schemes on “the rich.” But if we instead focus on what’s most important: differences between high-income and low-income households in after-tax income per person and per earner, and differences in consumption per person or per earner, the “defining challenge of our time” seems realistically to be much more of an “imaginary hobgoblin” (to quote H.L. Mencken) than a real problem or challenge that needs to be corrected.”

Mr. Perry followed on July 30 with more charts & analysis about the “disappearing” middle class.  He included an animated bar chart that shows the progress of the three income groups from 1967 through 2017.  

The new animated “bar chart race” visualization  is a dynamic version of the second static chart, and both show the percent shares of US households by total money income for three income categories annually from 1967 to 2017: a) low-income households earning $35,000 or less, b) middle-income households earning between $35,000 and $100,000 and c) high-income households earning $100,000 or more (all in constant 2017 dollars).

Here’s how I explained the income share trends displayed above in a post on CD last fall:

Yes, the “middle-class is disappearing” as we hear all the time, but it’s because middle-income households in the US are gradually moving up to higher income groups, and not down into lower-income groups. In 1967, only 9% of US households (only 1 in 11) earned $100,000 or more (in 2017 dollars). In 2017, more than 1 in 4 US households (29.2%) were in that high-income category, a new record high. In other words, over the last half-century, the share of US households earning incomes of $100,000 or more (in 2017 dollars) has more than tripled! At the same time, the share of middle-income households earning $35,000 to $100,000 (in 2017 dollars) has decreased over time, from more than half of US households in 1967 (53.8%) to less than half (only 41.3%) in 2017. Likewise, the share of low-income households earning $35,000 or less (in 2017 dollars) has decreased from more than one-third of households in 1967 (37.2%) to below one-third of US households last year (29.5%), a near-record low.

Bottom Line: As can be seen in the visualization above, America’s middle class did start largely disappearing in the 1970s, but it was because they were moving up to higher-income groups, not down into a lower-income category. And that movement was so significant that between 1967 and 2017, the share of American households earning incomes above $100,000 more than tripled, from 9% to 29.2%. Many prominent people like Paul Krugman and progressive politicians like Sen. Bernie Sanders and Sen. Elizabeth Warren claim that American’s middle class has been declining, disappearing, collapsing, losing ground, vanishing, stagnating, etc. But the Census Bureau data on household income over time displayed above demonstrate conclusively that those assertions are incredibly and verifiably wrong.

Think about it for a moment and let it sink in — in 2017 nearly one out of three (almost 37 million) US households had annual incomes of $100,000 or more. And the share of American households with that level of income has increased by more than three times since 1967! Then compare that picture of a prosperous America with millions of middle-class households moving up into higher income groups to the narratives we hear all the time that the American middle class is: losing ground, falling behind, collapsing, stagnating, disappearing, fill in the blank ________.”

The truth is sometimes not what we expected to hear, but can be liberating.

Until next time, Cheers,

Jim

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