The Myth of Income Inequality

By David A. Milstein, TheCollegeConservative.com

January 13, 2012

 

 

For years, the Left led by President Obama and aided by the robots in the media have continued to say there is a growing income gap in America. They say the rich are getting richer and the poor are being left behind. President Obama recently stated in his weekend address to the nation, “Over the past three decades, the middle class has lost ground while the wealthiest few have become even wealthier.” The recent flurry of news stories came as a result of a new Congressional Budget Office (CBO) report that concluded: “From 1979 to 2007, real (inflation-adjusted) average household income… for households at the higher end of the income scale rose much more rapidly than income for households in the middle or at the lower end of the income scale.”Not surprisingly, the Left jumped all over the airwaves to promote the report and argued for the need for higher taxes and redistribution. Yet some of the conclusions from studies like the CBO report can be extremely misleading and perpetuate fallacies about income and upward mobility in America.

First, the broad claims are true that categorically the top 1% continue to have higher income. The top 1%, like all levels, will continue to grow with technology, innovation and investment. We should be very worried if the opposite happened. Yet the problem with studies like the CBO report is they only take statistical, bracket snapshots of household income and fail to follow the growth of individual income over that same period of time, let alone measure the constant individual movement between the brackets.  As pointed out by renowned economist Thomas Sowell in his must-read new book Economic Facts and Fallacies; there is a huge difference between measuring household, individual and categorical data and our focus should instead be on the movement of individuals, not bracket growth.

Here is what he means.  Despite the conventional wisdom, a 2007 IRS, Treasury report studied individual tax returns rather than income brackets. It found between the years 1996 and 2005, those individuals whose income were in the top 1% and 5% in 1996 actually saw a decline in their income by 2005.   On the flip side, the IRS and Treasury found that the individual income for those in the bottom 20% in 1996 had an average income increase of 91% by 2005, almost doubling their income. They also found “roughly half of taxpayers who began in the bottom income quintile in 1996 moved up to a higher income group by 2005.”

The difference in conclusions is simple: individuals move between income categories all the time.  If someone who makes $70,000 a year and sells their $200,000 house in a given year, the snapshot of that given year will show much higher income. The same goes for a wealthy investor whose income could drop after losing a large investment.  These categories create the illusion that those who fill each bracket actually remain fixed there each year.

Second, it is very misleading to use household income levels as a way to measure the income gap.  Today, fewer people live in the average household.  As a result, total household income has decreased.  In fact, the latest 2010 Census report actually found there are almost five times more earners among wealthier households than those at the bottom, and those at the top are usually more educated and married.  Quite logically, those at the bottom are usually single-family households, young adults and less educated.  As you can see, it is easy for the household data to paint the wrong picture of income in America.

And finally, there is a major difference between income and wealth.  Seniors rely on Social Security or dividend payments from their stocks for much of their income once they retire.  But the decrease in their income doesn’t mean they are now categorically poor.  In fact in a 17-page rebuke of the CBO report, Rep. Paul Ryan noted that much of these studies don’t account for transfer payments. It also ignores the wealth that seniors have accumulated throughout their lives.

If I wanted to use Obama’s argument, a recent Census Bureau report highlighted by Investors Business Daily shows the greatest average household income gap in the last thirty years actually occurred under President Clinton and those at the very top actually lost income under President Bush. But it is extremely misleading.  It only shows a snapshot of the distribution of income during specific years. Instead we should focus on the individual income and recognize people move between multiple income levels throughout their lifetime.  Upward mobility, or even a loss of income is the essence of risk, reward, success and failure that happens within a capitalistic, opportunity society.  The Left has successfully created many economic fallacies like this one to promote their redistribution plans of taking more from the rich to give to the poor. In reality, it will simply lead to a contraction in the private sector and everyone financially worse off.  Rather than pushing for equal outcome that would only punish the more successful, we should instead promote equal opportunity to ensure greater upward mobility.  This is the principle that makes us an exceptional nation.

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16 Responses

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  1. Jordan
    Apr 07, 2013 - 11:22 PM

    Hey-o….

    I’m looking for that 2007 IRS report on the increase of income by 91%.

    Yeah I can’t find that report anywhere… do you mind sourcing it?

    Reply
  2. Ron
    Jan 16, 2012 - 03:18 PM

    Good article….I like Sowell also and quote him often…

    I am hard pressed to find anything that government does well… Power often come about by misleading the public. This is a growing problem with our government.
    Ron

    Reply
  3. Jeremy Wilson
    Jan 16, 2012 - 12:37 AM

    @Paulbkk your comments remind me of Churchill saying “If you’re not a liberal at twenty you have no heart, if you’re not a conservative at forty you have no brain.” John D Rockefeller was dirt poor when he was young, Chris Gardner…they made a movie out of his story played by Will Smith, most socialist love Hollywood, Andrew Carnegie was poor in Scotland so that’s like being destitute in America. Most liberal’s love Oprah she was really poor. Ben Franklin, John Paul Dejoria, the list goes on and on. This is only poor to wealthy, it doesn’t include the millions of people who have improved their lives and made a decent living.

    Kenneth Norman I hope you are a socialist or progressive or some type of collectivist because if you are not you need to be very careful of who you are learning from. Key words and phrases like “fair and open society. climate change, social justice. global government and partnership”, raise red flags, that’s why i researched the OECD awhile back; they have their fingers all over universities and they lead the conversation on Income Mobility which by the way is also a key word for it concentrates on working toward income equality instead of opportunity equality. So yes it would be possible to debate if you refuse to debate on principles and your belief in the collective. You believe and know what you know but please if you are supporting socialist lets not attempt to call it by another name or dress it up as anything other than from what it is.

    Reply
  4. Scott
    Jan 14, 2012 - 02:35 PM

    @Paulbkk, you are wrong, along with Miss Warren. You do realize what pays for those roads correct? Taxes, paved those roads, taxes paid when fuel is purchased. Fuel purchased to ship those goods to market. ALL paid for by that person that built the factory! You and Miss Warren fail to acknowledge the jobs and taxes that the “rich” person creates. Those truck drivers do not work for free! The workers working in that factory do not work for free! That one person decided to take a chance and in doing so created wealth for hundreds if not thousands of people! AND in doing so payed in more taxes than most could ever dream of! You fail to realize that the person that started that business may have started it to become rich but in doing so they create livelihoods for those in the community. Without the factories where would those people work?

    Reply
  5. Kenneth Normen
    Jan 14, 2012 - 11:51 AM

    Furthermore Jeremy, the OECD did not invent the concept, they just happen to have an easy explanation of it in their website. Here is another paper: http://eprints.lse.ac.uk/2190/1/Equivalence_of_Scales_and_Inequality.pdf . The term was coined by neoclasical economists, those most adept to defending capitalism and the free market, and has not been widely disputed in the last 20 years. Why don’t you show us what is wrong, because years of research by hundreds of economists have apparently been biased by a “socialist” agenda according to yourself.

    Reply
  6. Kenneth Normen
    Jan 14, 2012 - 11:43 AM

    OECD a socialist group? Seriously? It is just imposible to debate with you. Secondly, even if it were, math is math. Why don’t you first understand and study the concept and then critique it rather than just saying the first thing you can think of. That’s the problem with you guys, you argue on the basis of no real evidence.

    Reply
  7. paulbkk
    Jan 14, 2012 - 10:47 AM

    Income mobility is a zombie lie used by people who just want to cause confusion. Look around you, young man, do you see real upward income mobility for the majority of people? I don’t. I see that most poor people come from families that have been poor for generations, and most rich people started out in life with significant advantages that the poor could only dream of. Abundant recent research shows that income mobility is significantly higher in ‘socialist’ Europe than in the US.

    The argument that income inequality doesn’t correlate with wealth inequality is also incorrect. Wealth inequality is even greater than income inequality and shows even less mobility between groups.

    I hope that one day something will touch your heart, and you will understand that we are all in this together. Sometimes people need help from their community and their society. Those who have been more fortunate have a greater obligation to help those in need. As Elizabeth Warren said:

    “There is nobody in this country who got rich on his own — nobody.

    “You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did.

    “Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.”

    I didn’t understand some things when I was your age. It took me a long time to understand some things. You are young; you have time to learn the importance of caring about others. Good luck to you.

    Reply
  8. Dan
    Jan 13, 2012 - 12:29 PM

    The semantics used and the follow-up presentations have mixed propensity to influence one’s opinions. Economics is a ripe field that lends itself to many interpretations of data depending on the purpose of or the need of the presenter. There are so many formulae for use that one can either dazzle with data or mislead with data or just bore the hell out of the presentee! The rules for data manipulation and intent are probably as wide and varied as species of insects.

    Government, moreso than private industry, finds data manipulation a suitable partner in their quest to present data in the fashion needed to influence their constituencies. There are so many examples of such foolishness, but the current one is the “unemployment chart”. Results provided to the public are designed to fabricate data that best paints the final numbers wanted by the presenter. Current numbers seem to reflect only those people who file unemployment claims. It does not consider “true unemployment”, i.e., those who are no longer looking for a job and have given up and etc. The same with inflation. Key elements such as costs of food and fuel are summarily not used due to their rather quick changes in cost and price.

    Government analyses (CBO) should always be taken with a gray view. The old adage is so appropriate: ” Statistics lie and liars are statisticians” or something like that. Will we ever get true and realistic and understandable charts, graphs and results? Who knows! If we do there will have to be a mass re-education of people since most are wary of any truth or consistency in presnted data!

    Reply
  9. Jeremy Wilson
    Jan 13, 2012 - 11:55 AM

    Kieth Thats why the founders hated democracy and formed a Republic.
    http://youtu.be/KFXuGIpsdE0

    Reply
    • Keith Totherow
      Jan 13, 2012 - 12:20 PM

      Thanks for the link. I thoroughly enjoyed it. Now I feel better. :)

      Reply
  10. Jeremy Wilson
    Jan 13, 2012 - 11:50 AM

    Kenneth Normen the source from which you quoted from and I assume learned from, is from the OECD For those of you who are curious they are a socialist group Check out their own video on you tube
    http://youtu.be/MIEzs_ALxPE
    or check out their website.
    http://www.oecd.org/pages/0,3417,en_36734052_36734103_1_1_1_1_1,00.html
    Like I said and David A. Milstein, even better than I did, the numbers are manipulated to achieve social justice, redistribution of wealth and liberty for that matter.

    Reply
  11. Keith Totherow
    Jan 13, 2012 - 11:42 AM

    Regarding democracy: it’s often said our form of government is horrible, but remains the best form there is. Is this really so? I mean, isn’t there a better form of government, but we just haven’t found it yet? There must be, one would hope after reading the following:
    “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess of the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the results that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.” — Sir Alexander Fraser Tyler

    Reply
  12. Kenneth Normen
    Jan 13, 2012 - 11:34 AM

    Put simply, you’re wrong. The CBO’s estimates, if you ever took a statistics course, are not done stupidly. You actually believe no one in the CBO realizes what you point out?

    It’s called Equivalence or Income Elasticity Scales (http://www.oecd.org/dataoecd/45/58/1895548.pdf) and it is a statistical method used to design “households”. Contrary to your beliefs, the CBO doesn’t just go door to door and ask people what they earn. They use these scales to equal a lower income household (which, as you point out, have more people) to a higher income household. Once they are all equal on a measurement, THEN they measure changes in income, by CONTROLLING for other factors. Have you EVER heard of regression analysis?

    Sure, you can still criticize the specific application of the equivalence scale. Maybe the data is wrong (remember, statistics is noisy) or maybe the technique in and of itself is flawed (which you would have to demonstrate mathematically), but just assuming you know more about measuring income inequality than the CBO is stupid.

    Another point, mobility is not the same as inequality. You can have a very mobile society, where rich and poor switch places every few years, but that does not mean it is not unequal or even more unequal, as the rich (whoever they are) could be getting richer while the poor are becoming poorer.

    The truth of the matter is that while there is no flawless data that shows us income inequality is rising, there is even less data that tells us it is shrinking, making your point that it is a “myth” absolutely invalid.

    Reply
  13. Jeremy Wilson
    Jan 13, 2012 - 11:20 AM

    It’s not JUST that redistribution takes from the rich to give more to the poor; it takes from the rich to make more people poor.
    Economics can be very confusing when income tax is involved. Many of us can easily be fooled or even subjugated merely by a play on words and/or numbers. We fall into a false since of security because we see others going along with the deception while nodding their heads and smiling. In reality they are just as fooled.

    The line between capitalism and collectivism has been so blurred from “compromise” that we become disgusted every time a politician opens their mouth to speak, we barely listen to what they have to say and so only the platitudes and catch phrases stick.

    Our Republic has such a strong foundation, rooted in God, Liberty, the Individual, checks and balances to protect us from our own government, free enterprise, the ultimate mission statement Deceleration of Independence and the manual to protect the Declaration and our individual freedoms, the Constitution. It is almost impossible to destroy our Republic; it takes years and years of collective abuse to fundamentally transform who we are.

    That’s the key…”who we are” we are all Individuals with our own idea of happiness. We all share similarities with others, so we join groups with those like minded people but, groups are simply individuals standing together on one or a few ideas.

    Collectivist, socialist, communist, progressives or Liberals, whatever they are calling themselves at any given time, all their platitudes and catch phrases serve only to promote a group. They wish to achieve equal outcome but, who decides the outcome? Will that outcome resonate with your idea of happiness? What individual liberties will you have to surrender to achieve this planned equal outcome? What happens if a new leader comes along and changes the plan and the equal outcome no longer brings you happiness? If there is equal outcome, will there be equal effort?

    If the equal outcome turns us into a pure democracy and the largest group continues to win the elections time and time again, is that truly an equal outcome? And how is that different from the camp fire democracy? Two men and one girl sits around a fire. One man says I think we should have sex with the girl. The girl declines but the other man says let’s put it to a vote. Two against one, the men have sex with the girl. Is that girl your wife, sister, daughter, mother, cousin, friend…

    We are not a group, we are individuals united. Not in ideas but Liberty, Freedom and Country.

    Reply
  14. Keith Totherow
    Jan 13, 2012 - 10:43 AM

    I don’t advocate redistribution of wealth. At the same time, I have a lifetime of experience to educate me and don’t have to rely on the “data of the week,” whatever the “so-called” slanted media choose to educate me with. I also agree the media is slanted left, or right, depending on what you read. They are not in business to tell the truth, but to sell stories. Bad sells, good, not so much. I think you understand my point here. Eric Sevareid said it best: “The biggest big business in America is not steel, automobiles, or television. It is the manufacture, refinement and distribution of anxiety.” — Eric Sevareid, American news commentator (1912-1992).
    It’s true, we must use a measure of common sense when reading these economic reports. We must also realize that no one report will give us an accurate enough picture on which to base wide-ranging statements of income and wealth.
    When I read stories saying the real income level of the so-called middle class (I don’t qualify, being in the poor class) has dropped over the past 30 years, I believe it. I don’t have to go any farther than main street to see the results. I only have to look around me, at my neighbors. And, I only need to see that gas now costs $3.50 a gallon instead of less than a dollar, along with all the other commodities one needs to live that have steadily risen in cost over my lifetime (1951-now).
    It’s hard to sit here and read a college student’s take on the economy who probably has never had to choose whether to pay this or that bill this week, whether to choose to buy food or clothes, and who has most likely never had to live on his credit card’s credit limit, somehow managing to, over time, get out from under the debt he has unfortunately saddled himself with in his midguided youth.
    Jobs here in Catawba county still don’t pay much over $10 an hour, if they even pay that, unless you are a professional. It is very difficult to get those jobs without a high quality education and some kind of friend who helps you get hired. Through friends I have gotten most of the jobs I’ve ever held, not from answering ads. In today’s economy, one needs every advantage he can get to get hired, more than ever.

    Reply

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