President Obama called income inequality as “the defining challenge of our time.” Really?
All of the misfits decrying “income inequality” use the Census Bureau definition of “money income” (i.e., pre-tax), which excludes taxes and transfer payments (Medicaid, Medicare, Supplemental Nutrition Assistance Payments [food stamps], earned income tax credit, and Social Security). In effect, these misfits intentionally misuse data to support their political agenda, while ignoring the facts.
In addition, these extremists of the Democratic left omit changes in tax rules. For example, changes in tax law force high-income taxpayers to declare higher pre-tax income skew the results of any pre-tax analysis. In effect, these fanatics change the law to support their political agenda.
So how should so-called income inequality be measured. One measure is ‘consumption.” Much like a divorce attorney who doesn’t care what the husband earns but wants to see what the husband spends, consumption measures what has been spent, which is a more accurate measure of income inequality.
Let’s look at a macro-view of consumption. The Bureau of Labor Statistics Consumer Expenditure Survey for 2010-2012 showed consumption increases across all categories. This consumption trend tracks with Gross Domestic Product, which increased 2% from 2010 to 2013. In fact, GDP from December 2008 through September 2013 has grown approximately 8.5%. The proverbial pie has gotten bigger, not smaller. The share of GDP pie for the bottom 20% has expanded.
President Obama will look at Household Income limits by quintile for 1970 and 2000, for example and note that the lowest quintile increased income by 27% while the highest quintile increased by 64%. Obama would hang his hat on this snapshot in time, while ignoring the fact that individual move up and down through the quintiles depending on individual circumstances.
For example, let’s take John Doe, college student. Currently he falls in the lowest quintile because he works part time while going to school. After graduation, he lands a job that takes him into the second quintile. Within a few years, he marries. His wife works so he and his wife move into the middle quintile. After successful career mobility John Doe moves into the fourth (second highest quintile). Upon retirement, John cashes out his stock options and moves into the highest quintile.
After retiring, John falls into the second or third quintile. He lives on an IRA and social security payments. He might be living off a $5 million IRA but the Census Bureau doesn’t track this wealth transfer, even though John has to pay ordinary income taxes to the IRS on the wealth transfer. So what has been demonstrated is that Obama reacts to a snapshot in time that does not reflect reality and he wants to redistribute wealth based on this false data. The scenario presented, multiplied by the American population, demonstrates that households (families and individuals) move up and down, over time, through the quintiles.
This mobility has been validated by a Treasury Department study released in 2007 that examined income mobility from 1996-2005 (I could not locate any update to this study). The study, using income tax return data, showed that 58% of the households in the lowest quintile in 1996 moved to a higher quintile by 2005. During the same period, 50% of the households in the second lowest quintile moved to a higher quintile.
What about the top quintile? Yes, households do drop out of the highest quintile. The Treasury study found that, for the same period, 57% of the richest 1% of households fell out of the top quintile; 45% of the richest 5% of households fell out of the top quintile.
Obama’s complaint about income inequality is a canard. Lee Ohanian and Kip Hagopian, authors of The Mismeasure of Inequality (Policy Review, 2011), concluded that once that effects of transfer payments and taxes are included, income inequality actually dropped by 1.8% between 1993 and 2009. The authors also concluded, based on a study by Columbia University economists, that since 1967, America’s poverty rate dropped from 26% to 16%, a 40% rate of change.
Income inequality is a Marxist distraction. The real problem is reducing poverty. This can be accomplished by creating jobs.