The Myth of American Inequality

by Phil Gramm

In fact, one study found that between the ages of twenty-five and sixty, more than 75 percent of Americans had incomes that put them in the top quintile for at least one year.

Failure to appreciate these two characteristics can lead to statements such as “the poor became poorer” or “the rich became richer.” These statements are inherently misleading because many of the poor and many of the rich were different people at the two points in time being compared.

The increase in the income of the household does not make the poor appear richer because the household is now counted in the middle quintile.

In 2017, the most recent year for which we have complete data, the 20 percent of households with the lowest earned income on average earned $4,908. That is less than 5 percent of the $102,093 average earned by American households.

Among the top 20 percent of households with the highest incomes, the average household earned $295,904, 60 times as much as the average household in the bottom 20 percent

More than 88 percent of all income earned by American households in 2017 was paid in wages, salaries, and employment benefits, so it is hardly surprising that employment income was the source of most of the overall inequality in income earned by American households.

First, households had fewer workers than in other quintiles. Half of the adults were retired.

only 36 percent worked. Second, those who did hold jobs worked only 17.3 hours per week, or less than half as many hours as the average worker in the other quintiles.

the average top-quintile household earned $212,494 in wages and salaries because almost all their prime work-age adults worked, as did many of their retired and students, and, on average, they worked 38.6 hours per week.

Employer contributions to defined contribution retirement plans are counted as income at the time of the payment because the employee owns the value in the plan. For defined benefit plans, the employer benefits are counted at the time they are paid out, and they are a significant part of the employer benefits for retirees in the bottom quintile.

Just as Census has excluded in-kind transfer payments to lower-income households, it has also excluded in-kind employer benefits—the most significant being employer contributions to medical insurance premiums.

the income from investing adds capital gains from asset sales, which Census excludes.

A research team of academic economists and Census Bureau staff audited the Current Population Survey data using administrative records and other data sources to check the accuracy of the reported income of those who reported extraordinarily low incomes. They found that 90 percent of these individuals were misclassified as extremely poor.

Half of them were not even poor, and some were in the middle income quintile.

In total, all four improvements added 14.9 percent to the Census income estimate for the bottom quintile and 36.0 percent to the estimate for the top quintile.

net effect of the improvements was to make the measured difference in earned income between the top and bottom 18.3 percent more unequal.

This transfer of earnings from workers in higher quintiles to retired individuals in lower quintiles is a major factor in reducing income inequality. In

The Social Security system grants disproportionately higher benefits to low-income workers for every dollar they paid in taxes. The net result is that Social Security retirement benefits, relative to Social Security taxes paid, are five times greater for low earners than for high earners.

For example, Medicare and Medicaid programs use government regulatory force and monopsony power

market to compel physicians, hospitals, and other healthcare providers to accept payments that are not only below market value but also, in many cases, even below cost, thereby creating financial losses for providers on the sale of healthcare

In those cases, providers shift costs to privately insured and self-pay patients, raising their prices on average to 7...

The average household in the bottom quintile received an astonishing $45,389 in government transfer payments annually, more than nine times greater than its earned income.

That decision eliminated $80 billion in cash paid to low-income households.

The exclusion of food stamps and other nutrition programs because they are “not cash” seems impossible to justify. Just because the payment is on a debit card that can be used only for food does not make the $64 billion of taxpayer money worth zero, as the Census method implies.

Nevertheless, the bottom quintile received a meaningful average transfer of $3,313 per household from these sources

The top quintile on average paid $80,828 of federal taxes, more than eighty-three times as much as the bottom quintile. The federal personal income tax was the largest tax payment, with top-quintile households paying an average of $54,006, while the bottom two quintiles paid no federal income tax

The average bottom-quintile household earned only $4,908 but received $45,389 in government transfers and $3,313 from private transfers, bringing its total income to $53,610. It paid $3,996 in payroll, excise, sales, property, and other taxes, which reduced its after-tax income to $49,613.

Although their income before taxes was $9,155 higher than the average for the bottom-quintile household, they paid more than half of that difference in higher taxes because a greater portion of their income was

taxes. As a result, the average second-quintile household had only 9 percent more income after taxes than the bottom quintile had.

That reduced their after-tax income to $197,034, only 67 percent of what they had earned.

The results of Table 2.4 are startling. The most surprising result is just how distorted the general perception of income distribution is when one takes full account of all transfer payments and taxes. While the average top-quintile household earned 60.3 times more than the average bottom-quintile household, it was left with only 4.0 times as much income after accounting for all transfer payments received and all taxes paid.

An eye-catching result in Figure 2.1 is that the bottom quintile’s average net income after transfers and taxes is $49,613, clearly within the range of what is generally considered the earned income of middle-income America, $46,656 to $87,171 (see Table 2.1).

Government takes and redistributes enough resources to elevate the average bottom-quintile household into the American middle class.

This means the second quintile is only slightly better off than the bottom quintile despite the fact that the second quintile earned more than six times as much, it had more than twice the proportion of its prime work-aged adults working, and they worked, on average, 1.8 times as many hours per week.

The bottom quintile has on average only 1.69 people living in each household. The higher quintiles have 2.23, 2.51, 2.81, and 3.10, respectively. These differences are readily understandable because the lower income quintiles have disproportionate numbers of households headed by young people who have yet to marry or have children and by seniors whose children have left home and whose spouses may have died.

The old stereotype of a poor household in America being composed largely of a single mother and a house full of children is fifty years out of date.

The higher quintile households have on average $32,477, $35,142, $40,549, and $78,837 per capita, respectively. On a per capita basis the top quintile has only 2.2 times as much income per person living in the household as the bottom quintile, a considerably smaller difference than the 4.0 times as much without any

But the blockbuster finding is that on a per capita basis the average bottom-quintile household receives over 10 percent more than the average second-quintile household and even 3 percent more than the average middle-income household!

Per capita comparisons are used for many statistics, but we know that if two people combine their incomes and live together, they can achieve a higher standard of mate...

The average second- and middle-quintile households worked more and earned more than those in the bottom quintile, and yet, extraordinarily, the bottom 60 percent of American households all received essentially the same income when we count all transfer payments received and taxes paid and adjust that income for household size. This virtual equality

incomes after transfer payments and taxes in the lowest 60 percent of households is the result of two factors.

This government-engineered equality of income for the bottom 60 percent of American households is a new dimension that must be addressed in future policy debates.

The politics of envy based on income inequality has always been a hard sell in America.

Americans have tended to believe that people become rich because they work hard and are smart, but it is hard to see how a middle-income family with two adults both working

would not resent the fact that other prime work-age people who are not working at all are just about as well off as they are. It might be fair that Bill Gates is rich, but it seems unjust that 60 percent of Americans have virtually the same standard of living despite dramatic differences in their work effort and levels of earned income.

the average bottom-quintile household with about as many resources as the second and middle quintiles, even though prime work-age persons in the bottom quintile are less than half as likely to work and work only about half as many hours when they do work.

The number of Americans living in poverty had already fallen from 32.1 percent of the nation’s population in 1947 to 14.7 percent in 1965.

After spending on the War on Poverty ramped up, the official rate of poverty, in fact, stopped improving. For more than fifty years since then, it has simply oscillated within a relatively narrow range between 11.1 percent and

15.2 percent—rising a few points during recessions and dropping similar amounts during recoveries.

shown in Chapter 2, the Census counted only about one-third of the total of all government transfer payments as income, but among those families that they classified as poor, Census counted only 12 percent of the total transfer payments they received. This lower percentage of counted transfers among the poor occurs because the vast majority of the uncounted transfer payments have income criteria that target them specifically toward the poor, such as food stamps, the refundable portion of the Earned Income Tax Credit, Medicaid, and most public housing subsidies. Most of the uncounted programs did not exist in 1963,