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News Alert: Income Inequality is Not What You’re Being Told

You may remember that President Obama was to make the scourge of income inequality the laser focus of the remainder of his presidency. We have’t heard much about it lately, because, with the exception of golf – or winning an election – our president is not really able to maintain his focus on anything for particularly long or with much consistency.

Well it turns out Obama’s erratic attention to the matter may be warranted.

Writing in the Wall Street Journal, former Sen. Phil Gramm and Michael Solon explain a study questioning whether income inequality is really the exploding problem it’s made out to be.

Gramm, who, you might know, was an economist before he got into politics, notes that the income inequality argument is driven by “a now-famous study” by economists Thomas Piketty and Emmanuel Saez. But there are problems with their methodology:

The Piketty-Saez study looked only at pretax cash market income. It did not take into account taxes. It left out noncash compensation such as employer-provided health insurance and pension contributions. It left out Social Security payments, Medicare and Medicaid benefits, and more than 100 other means-tested government programs.

Realized capital gains were included, but not the first $500,000 from the sale of one’s home, which is tax-exempt. IRAs and 401(k)s were counted only when the money is taken out in retirement. Finally, the Piketty-Saez data are based on individual tax returns, which ignore, for any given household, the presence of multiple earners.

The new study by Economists Philip Armour and Richard V. Burkhauser of Cornell University and Jeff Larrimore of Congress’s Joint Committee on Taxation fills in the missing data.

Gramm and Solon write:

The result is dramatic. The bottom quintile of Americans experienced a 31% increase in income from 1979 to 2007 instead of a 33% decline that is found using a Piketty-Saez market-income measure alone. The income of the second quintile, often referred to as the working class, rose by 32%, not 0.7%. The income of the middle quintile, America’s middle class, increased by 37%, not 2.2%.

By omitting Social Security, Medicare and Medicaid, the Piketty-Saez study renders most older Americans poor when in reality most have above-average incomes. The exclusion of benefits like employer-provided health insurance, retirement benefits (except when actually paid out in retirement) and capital gains on homes misses much of the income and wealth of middle- and upper-middle income families.

Messrs. Piketty and Saez also did not take into consideration the effect that tax policies have on how people report their incomes. This leads to major distortions. The bipartisan tax reform of 1986 lowered the highest personal tax rate to 28% from 50%, but the top corporate-tax rate was reduced only to 34%. There was, therefore, an incentive to restructure businesses from C-Corps to subchapter S corporations, limited-liability corporations, partnerships and proprietorships, where the same income would now be taxed only once at a lower, personal rate. As businesses restructured, what had been corporate income poured into personal income-tax receipts.

So Messrs. Piketty and Saez report a 44% increase in the income earned by the top 1% in 1987 and 1988—though this change reflected how income was taxed, not how income had grown.

An equally extraordinary distortion in the data used to measure inequality (the Gini Coefficient) has been discovered by Cornell’s Mr. Burkhauser. In 1992 the Census Bureau changed the Current Population Survey to collect more in-depth data on high-income individuals. This change in survey technique alone, causing a one-time upward shift in the measured income of high-income individuals, is the source of almost 30% of the total growth of inequality in the U.S. since 1979.

What this study demonstrates is that the United States, as you may have suspected, is not just a place of opportunity for the wealthy.

As long as I have a chance to better my position, what really do I care if there is substantial income inequality? Should I be keeping track of whether my rich neighbor is driving a 2009 Porsche or a 2014 Porsche? How does it benefit me to resent the success of others?

Besides, wealthy people rarely store their income in old Maxwell House cans. They spend it or invest it. Either they are making money with their money, or someone else is.

Everyone I’ve ever worked for was wealthy. Well, until I started working for myself. Should I have resented them for giving me a job and paying my health insurance out of their pocket? Should I have wished they had less money so they could pay me less and maybe fire one of my co-workers?

Here’s a toast to the wealthy. Most of you earned it through sacrifice, hard work, and risk. May this always be a country where you will be comfortable keeping your wealth, and where others will be free to rise up the income ladder and join you.

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12 Responses to News Alert: Income Inequality is Not What You’re Being Told

  1. A hearty “Hear, hear!” to your conclusion. Wealth is not evil. Those who envy and denigrate the wealthy are evil. We need to recapture the high ground on this issue. We’ve had about enough of wanting to turn the USA into some communist, “everyone is the same” utopia.

  2. This explanation is all well and good, but that’s not what MrO might be addressing. He (and all the other do-gooders) seem to think that any labor should be paid as well as learned labor.
    If you flip burgers, then the progressives want you to earn as much as someone who went to a trade school, or college.
    There goal is that women should be paid the same as men for the very same job; something we can all agree with, but their pcriteria is that women who work in the same environment, or business, should be paid equally with any man, regardless of their work duties.

    The economists who are quoted ^ above produced a half-vast report and should have been fired for incompetence.

  3. There’s a mighty big gap betwixt trickling down and getting peed upon.

    You’re right, Keith. We should emulate the rich and their accomplishments — they didn’t get wealthy by stealing our money (unlike the government).

    Speaking of which,on the topic of “income inequality”: I can only think of one person whose short day starts at 10 AM, usually revolves around talking to human props, will “work” for eight years and then retire in obscene wealth, has a limitless expense account, and gets to spend millions of dollars of other people’s money without having to pay back a dime of it.

    Pardon me, but isn’t HE the same one complaining here?

    • We used to respect and idolize the successful people, that is, until Obama and Hillary Clinton,and that vane Pelosi who are RICH and possibly crooks, started to denegrate them. The three of them, laughing all the way to the bank, finetuning their gimmicks, like the War on Women and the Rich don’t create jobs, their assistants must have stayed up all night dreaming of those gimmicks for them. Hillary Clinton, now an old hippie, can’t forget her anti-America/anti-war days, she had so much fun then, hating her country and still does and she wants to be President of the country she has always hated? She is counting on he stupid voters again like Obama did. We have to get rid of Obama also and nasty arrogant Pelosi, telling lies every day on her soap box. Reid is not gone but he is really gone finally. All these rich mean people who hate the rich, running the country to the ground, they will all be gone, but why were they around so long when almost everyone hated them? Money buys anything I guess, money and power have shoved them in our faces and we want to get rid of them so badly, that is, most of us want to get rid of them so badly.

  4. Well, I’m going to veer off a tiny bit from what Keith and the Dossier-ers are saying. I agree with what you say, but keep in mind that there have been many Democrats, liberals, and sundry snakes-in-the-grass Obots who have done very well in spite of their hypocritical talk about income inequality and spreading the wealth around. Cronyism and nepotism, not the old fashion way of earning it.

  5. Update to this debate:

    “However, CBO also projected forward to 2013. Based on tax increases that began in 2013, CBO predicts the top 1 percent paid a 33 percent effective rate in federal taxes last year. Obama’s policies have more than established the Buffett Rule….

    CBO also shows that higher income earners paid larger shares of tax. The top 1 percent, for instance, earned almost 15 percent of income and paid 24 percent of federal taxes. The top 20 percent earned 51.9 percent of income and paid 69 percent of taxes.”

    http://dailysignal.com/2014/11/13/richest-1-percent-americans-pay-24-percent-federal-taxes/