The View From 1776
Saturday, December 15, 2007
Income Gap Statistics
The income gap, like candidate John F. Kennedy’s 1960 criticism of President Eisenhower for a missile gap, is greatly exaggerated.
The New York Times’s hardy perennial has sprouted again. David Cay Johnson, who specializes in reposting this “news” article in the Times a couple of times a year, editorializes against the great bete noir of liberal-progressive-socialism: unequal distribution of income.
A liberal-progressive-socialist society requires homogenized distribution of income, housing, education, medical care, and all goods and services, without regard to merit, capability, or real productive work. Councils of intellectuals and armies of bureaucrats will determine who gets what.
In Report Says That the Rich Are Getting Richer Faster, Much Faster (December 15, 2007) Times reporter Johnson writes:
The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows.
The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.
The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed.
As usual, the CBO and the Times use statistics based upon household incomes. Statistics based upon individuals’ incomes tell a different story.
Economist Thomas Sowell observes (Income Confusion, November 21, 2007):
Another wild card in income statistics is that many such statistics are about households or families—whose sizes vary over time, vary between one racial or ethnic group and another, and vary between one income bracket and another.
That is why household or family income can remain virtually unchanged for decades while per capita income is going up by very large amounts. The number of people per household and per family is declining.
Differences in the number of people per household from one ethnic group to another is why Hispanics have higher household incomes than blacks, while blacks have higher individual incomes than Hispanics.
Moreover, as Sowell notes in the same article, statistics based on actual, individual tax returns for individuals, tracked over time, belie the CBO data and the New York Times’s story line:
...income tax data recently released by the Internal Revenue Service seem to show the exact opposite: People in the bottom fifth of income-tax filers in 1996 had their incomes increase by 91 percent by 2005.
The top one percent—“the rich” who are supposed to be monopolizing the money, according to the left—saw their incomes decline by a whopping 26 percent.
Meanwhile, the average taxpayers’ real income increased by 24 percent between 1996 and 2005…
One of these wild cards is that most Americans do not stay in the same income brackets throughout their lives. Millions of people move from one bracket to another in just a few years.
What that means statistically is that comparing the top income bracket with the bottom income bracket over a period of years tells you nothing about what is happening to the actual flesh-and-blood human beings who are moving between brackets during those years.
That is why the IRS data, which are for people 25 years old and older, and which follow the same individuals over time, find those in the bottom 20 percent of income-tax filers almost doubling their income in a decade. That is why they are no longer in the same bracket.
That is also why the share of income going to the bottom 20 percent bracket can be going down, as the Census Bureau data show, while the income going to the people who began the decade in that bracket is going up by large amounts.
Unfortunately, most income statistics, including those from the Census Bureau, do not follow individuals over time.
(Thomas Sowell, Income Confusion: Part II, November 20, 2007)
Those statistics do not include income received by low-income people as transfer payments from the government, such as welfare checks, much less various in-kind transfers, such as subsidized housing and subsidized medical care.
As of 2001, about 78 percent of the economic resources used by people in the bottom 20 percent of income recipients were in the form of either cash transfers or in-kind transfers.
To judge the standard of living of low-income people by income statistics is to leave out more than three-quarters of the economic resources used by them.
Columnist Sowell again: (That “Top One Percent,” November 27, 2007):
Americans in the top one percent, like Americans in most income brackets, are not there permanently, despite being talked about and written about as if they are an enduring “class”—especially by those who have overdosed on the magic formula of “race, class and gender,” which has replaced thought in many intellectual circles.
At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.
Among the top one-hundredth of one percent, three-quarters of them were no longer there at the end of the decade.
These are not permanent classes but mostly people at current income levels reached by spikes in income that don’t last.
These income spikes can occur for all sorts of reasons. In addition to selling homes in inflated housing markets like San Francisco, people can get sudden increases in income from inheritances, or from a gamble that pays off, whether in the stock market, the real estate market, or Las Vegas.
Some people’s income in a particular year may be several times what it has ever been before or will ever be again.
In short, liberals, led by the New York Times editorial board, are cherry-picking statistics to present a misleading picture of personal income distribution.