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.