The old affirmation that “the rich are getting richer and the poor are getting poorer” is a claim frequently bandied about in the rhetoric of politicians on the left, and, I am sure, many of your professors. We hear it so often, in fact, that it has become a morbid assumption that few pause to question the validity of. When John Edwards in 2003 declared the existence of “two Americas” – one working more and paying taxes, the other working less and paying little – he won the adoration and attention of the media.
Fortunately, this overall assertion is categorically untrue. The division that Edwards portrays may exist, but it is certainly not the “privileged” that are the ones goofing off and shirking taxes, as he implies. Instead, the top fifth of U.S. household perform a full third of all labor and pay four-fifths of all federal income taxes. The “rich” that we so willingly demonize are the most productive workers and whom our economy is heavily dependent upon. Half of the country’s population pays a full 96 percent of federal income taxes (U.S. Budget, Fiscal Year 2007).
The figures produced by economists Thomas Piketty and Emmanuel Saez in 2001 have been widely responsible for the acceptance and perpetuation of the claim that inequality has been on the rise. The problem with the economists’ otherwise compelling claim is that they used tax returns to produce their data and conduct the longitudinal comparison. Because the tax code has changed so often and so significantly over the 30 years that Piketty and Saez examined, it is very misleading to make comparisons that neglect to acknowledge the shift in income reporting. Changes to tax administration have meaningfully affected how individuals file taxes and thus render data between the years incomparable. For Piketty and Saez to be correct in asserting an upward trend in income equality, all other estimates of income distribution, which analyze income in a different way, would have to be wrong – including those of the Census Bureau, the Congressional Budget Office and the Federal Reserve Board.
Indeed as the Cato Institute found upon more comprehensive research, “aside from changes in taxpayer reporting due to changes in the tax laws, there is no clear evidence of a significant and sustained increase in the inequality of U.S. incomes, wages, consumption or wealth since the late 1980s.”
We have been too hesitant to state the obvious: This income inequality is explained, in large part, by inequality in work performed and certainly inequality in the contribution to the overall economy.
Methodological flaws aside, the alarm at income inequality neglects to acknowledge the monumental proportion of taxes that the “rich” pay into the system, and the similarly skewed proportion of government benefits and services the so-called “poor” get out of it.
While neither taxes nor benefits are often conceived of as relating directly to income, it is logical to conceive of them that way. The benefits that a lower income entitles you to in this country in the form of health services, food stamps, childcare and education have substantial monetary value that is disregarded by income inequality alarmists.
These benefits are secured and growing – the proportion of the federal budget spent on these kinds of individual benefits has been steadily rising over the last two decades, currently representing about 60 percent of America’s almost three trillion dollar budget.
Indeed, despite the outcry at the share of wealth in the hands of the top earners, there have been no claims, nor is there evidence to support that the standard of living for the middle or lower classes is declining. An American in the bottom 10 percent of the income bracket is still earning more than two-thirds of the world’s population, according to figures from the World Bank.
Unless we adopt socialism in the near future, income inequality will persist. Those who work harder, longer and contribute more to the economy – creating jobs and paying heavily into the system – will earn more money than those who do not. The justice in that reality is debatable.
Households comprising the bottom quintile will pay just 1.1 percent of total federal income taxes, yet reap a substantial proportion of federal budget expenditures in the form of benefits. The justice in that reality is also debatable.