We need to think differently about income inequality.
You know the conventional wisdom. Except for the top 1 percent and the upper middle class, most Americans are treading water. Their incomes have stagnated for decades. Worse — and despite contrary pledges from President Trump — this will persist, because the rich are grabbing more income for themselves through campaign contributions and lobbyists. Trump’s tax cut, weighted toward the rich, proves the point.
This is, at most, half the story.
We now have a new report from the Congressional Budget Office that supplies some of the necessary qualifications. Called “The Distribution of Household Income, 2014,” it provides the most detailed examination of income inequality by assessing virtually all changes to after-tax income — not only wages but also taxes and government benefits.
The picture that emerges departs from conventional wisdom. Rather than ignoring the plight of the poor, government redistributes hundreds of billions of dollars a year by taxing the rich and transferring the proceeds to low-income households. This routine redistribution tends to be minimized in our discussions of inequality.
Look at the table below, adapted from the CBO report. It divides the population into five parts, from the poorest fifth to the richest. It then reports average income for each fifth of the population, reflecting market income (wages, salaries, investment and business income), means-tested transfer payments (Medicaid, food stamps and other income-eligible programs) and federal taxes.
As the table shows, there is a massive amount of income redistribution, mainly from the richest fifth of the population to the poorest two-fifths. (Means-tested programs have income eligibility requirements. Social Security and Medicare are not means-tested and are counted as market income. Medicaid and food stamps are means-tested.) Government transfers are added to income; taxes are subtracted.
To take two examples from the table: The poorest households received $12,000 in government benefits in 2014, which increased their income by about 60 percent; meanwhile, the richest fifth of households paid $75,000 in average taxes, cutting their income by about 25 percent.
|Poorest Fifth||Second Fifth||Middle Fifth||Fourth Fifth||Richest Fifth|
Source: Congressional Budget Office, "The Distribution of Household Income, 2014."
So the first corrective to conventional wisdom is this: Government already provides significant redistribution. Maybe we should have more, maybe less. But we shouldn’t start with the notion that low-income households don’t stand a chance against the influence-peddling of the rich and well-to-do. History doesn’t support that. In 2014, the richest 1 percent paid 27 percent of federal taxes, and the richest 20 percent (including the top 1 percent) paid 70 percent of all taxes.
The second corrective is related: When adjusted for government benefits and taxes, all income groups have achieved sizable income gains (after inflation) since 1979 or 2000. It’s true that the top 1 percent has gotten richer faster than everyone else; its gain since 1979 is a huge 228 percent.
Gains by other groups aren’t nearly as large, meaning that economic inequality is increasing, at least at the top. Still, the gains are noteworthy. Here are some figures: For the poorest fifth of Americans, the average income gain was 69 percent since 1979; it was 73 percent for the richest fifth, minus the top 1 percent; and 42 percent for the middle three-fifths of Americans. All groups also had gains since 2000.
Just why so many Americans think their living standards have stagnated or declined is not clear. One plausible explanation is that wage and salary increases — the most visible part of income for most households — have grown slowly, if at all. Another possibility is that average gains in many years, about 1 percent, are so small that they’re not recognized.
It’s important to get the story straight, because it influences the way people view government and politics. We have not produced a government for and by the rich and the upper middle class. The problem in some ways is just the opposite: Government and politicians have promised so much to so many that it’s hard to keep all the promises.
Similarly, economic growth has slowed, but it hasn’t stopped. Advances in living standards endure, even though they may seem more grudging. We’re better off with these messy truths than with the politically convenient fiction that hardly anyone, with the exception of those at the top, has gotten ahead. This is a formula for undue pessimism.
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