With Nevada’s legislature and the U.S. Congress now in session, folks hear constantly about economic inequality (the rich getting richer and poor getting poorer), growing poverty, the stagnation of most incomes, and needs for more income redistribution. The inequality myths were roundly rebutted in the last Controller’s Annual Report (CAR) in 2018 (full disclosure: authored by Yours Truly). The facts there, plus others debunking all these myths have been further buttressed in a major book and other publications recently. Also, the CAR showed why the debates on these matters are misplaced in principle.
The flaw with data used to claim extreme and growing income inequality is that it omits two major factors: the high progressive taxes paid by high-income folks; and two-thirds of the extensive governmental transfer payments paid mainly to people in the bottom three income groups, or quintiles, (60 percent of households). These factors, especially taxes, have corrosive effects on individual freedom, economic growth, fairness and thus overall human wellbeing. The sad irony is that people purporting to be concerned about inequality, poverty and stagnation propose more of the same taxes and transfers, which have the effect of further diminishing freedom, growth, fairness and wellbeing for those with lower incomes at least as much as for the well off.
The most extensive new evidence appears in “The Myth of American Inequality” by economists Phil Gramm, Robert Ekeland and John Early. They show that the bottom two quintiles pay almost no income tax, while the top quintile of earners pays 83 percent of federal income tax revenue. From transfers – Medicare, Medicaid, food stamps, child tax credits, etc. – the bottom quintile gets 59 percent of its income and the second lowest quintile gets 24 percent. The top one percent of earners pay 42 percent of income tax revenues, while the bottom 40 percent pay about three percent. And the rich aren’t already paying their fair share?
When the full effects of taxes and transfers are included, the two lowest quintiles’ net incomes rise nearly to the level of the middle quintile – that is, to the $50,000 to $66,000 annual middle-income range. The fourth quintile net income average is about $88,000 and the top quintile roughly $197,000. Without these corrections, the average earned incomes of the bottom and top quintiles are $5,000 and $297,000, respectively. So, the real top-to-bottom income ratio is not 59:1 as sometimes claimed; instead, a modest 4:1. And contrary to government statistics omitting transfers and showing 12 percent of households in poverty, the real rate is two percent.
Stagnation? The main claim is that real average earnings have risen only 8.7 percent over the last 50 years. But this is a false measure because it omits the two-thirds of income transfers. Also, because these statistics rely on inappropriate inflation measures. When those two factors are corrected, the real average income figures actually climbed by 74 percent. But one final correction is also needed. The quintile measures treat the makeup of each 20 percent as if it were static, which it definitely is not. Income mobility is a major benefit of our economy: people move up and down over their lives. Consult your own experience. (I’ve been in all five quintiles.) Hence, the poor getting poorer and rich getting richer is false in multiple ways.
As the CAR pointed out, this entire debate is misplaced in principle. In a mostly market economy such as ours, the vast majority of people get income and accumulate wealth in proportion to the value they deliver to others – not via inheritance or plunder. Economists call this value consumers’ surplus or buyers’ surplus; it is huge and a direct measure of producers’ contribution to the public interest. While we rightly give income transfers to folks who, through no fault of their own, cannot reasonably provide fully for themselves, another aspect of fairness is allowing those who have earned income and wealth to keep it.
Ron Knecht is Senior Policy Fellow at Nevada Policy Research Institute.
