The Myth of American Inequality

by Phil Gramm

Had those missing transfer payments been counted, the actual incomes for many of these families would have been well above the poverty thresholds.

Because most of the spending on massive transfer payments undertaken by the federal government to alleviate poverty was never counted in the official poverty measure, the poverty rate did not improve.

When the poverty rate is recalculated using official government data that incorporate a full accounting of all transfer payments as income,4 the percentage of Americans living in poverty drops sharply to only 2.5 percent.

But the calculation of poverty based on families rather than households produces an unusual and sometimes misleading result.

two unmarried, unrelated adults live together in a single household, each one of them (along with any of his or her children) is treated as a separate family.

As unbelievable as it may be, about 1 percent of the people counted as poor in the official poverty measure live in households in the top income quintile,

The percentage of children living in poverty drops from 17.5 percent to only 3.1 percent.

The first is a set of measurements based on what households consume.

Because the majority of people who fall below the poverty thresholds do so for relatively short periods, their consumption does not show the same drop as their income because they draw on savings, borrow, or consume the stored value of assets like owned homes and automobiles until their economic situation

They discovered that only 2.8 percent of people in 2017 consumed an amount of goods and services that would put them below the real-dollar consumption poverty level of 1980,8 substantially fewer than the Census count of 12.3 percent of the population.

namely, that the current official measure of poverty is about four times larger than it should be.

standard of living of families officially classified as poor by Census and demonstrates that most of those defined by the Census as being poor actually have a standard of living more consistent with being middle income.

households that are officially defined as being poor, 42 percent owned their own home with, on average, three bedrooms, one and a half bathrooms, a garage, and a porch or patio.

Only 7 percent of the poor lived in housing classified as “crowded,” and two-thirds had more than two rooms per person.

mere 1 percent of all housing for the poor was classified as “severely inadequate,” only one-quarter as much as in 1975,10 and most of that inadequacy was concentrated in public housing provided by local governments like New York City.

For example, 88 percent of poor households had air conditioning, compared with only 12 percent of the entire population that had air conditioning in 1964. Most families classified as poor had multiple color televisions, one-third with wide, flat screens. Two-thirds had cable or satellite television. One-quarter had a digital video recorder.

The success in defeating hunger among the poor was documented in 2009 by the Census Bureau. It reported that 96 percent of poor parents were confident that their children were never hungry at any time during the year, and 83 percent of poor families said that they always had enough food to eat.

In fact, poor and middle-income children consumed the same amounts of protein, vitamins, and minerals.

report, titled “What We Eat in America,” showed that for the years 2013–2014 there was no statistical difference in the calories consumed per person between families with incomes of less than $25,000 and families with incomes more than $75,000.19

The claims of significant hunger or malnutrition are misrepresentations of a USDA survey that reported 40 million people being “food insecure” in 2017.20

As surveyed by government, food insecurity is a state of mind, not an objective measure or medical condition of actual hunger and malnutrition.

The direct, objective evidence cited above from both the Census and the USDA shows that the occurrence of actual hunger or malnutrition is far less frequent than the reported measure of food insecurity would suggest.

household received a new and continuing subsidy of extra money to buy food, the attitude of people in the household about food security did not improve.

resulting in a 42 percent increase in the number of people receiving food stamps. It is astonishing that with increasing economic security and greatly expanded government subsidies for purchasing food, the measure of food insecurity hardly changed, declining by less than 3 percent.

Among families defined as poor, hunger has been virtually eliminated, inadequate housing has all but disappeared, and the amenities of daily life have expanded. These data constitute definitive, independent verification of the vast historical reduction in poverty from 17.3 percent of our population as the War on Poverty began to only 2.5 percent in 2017.

In the very few situations in which hunger and real poverty still exist today, there are generally underlying capability or behavioral issues that cannot be solved simply by expanding

aggregate welfare spending.

Our success in virtually banishing poverty is an important victory and a tribute both to the power of our economic system to generate the world’s largest national income and to the trillions of dollars in taxpayer support for low-income households. Yet the official statistics obscure these triumphs because federal statistical agencies continue to undercount transfer payments to low-income Americans and, in the process, overstate the poverty rate.

Except for a very few individual outliers who have special needs that income redistribution cannot meet, America’s poverty program has virtually eliminated most poverty and raised most households to middle-income levels. But in another sense, the War on Poverty has been an abject failure because it has failed in President Lyndon Johnson’s second main objective: “to give people a chance … to allow them to develop and use their capacities.”

The explosion in transfer payments to low-income Americans since 1967 has induced twice as many prime work-age adults among the poor to stop working and accept government subsidies, exchanging development and use of their capabilities for idleness.

that from 1947 to 2017, total real transfer payments grew 211.9 percent faster than total real earned personal income.

Taxes grew a less dramatic 7.1 percent faster than earned income over the last seventy years.

Income and payroll taxes rose 21.2 percent faster than income, while sales, excise, and property taxes rose 8.3 percent slower than income.

As a result, an increasing share of the tax burden has been shifted from low- and middle-income households to higher-income households, thereby reducing income inequality.

partly offset by the effects of adding employer-paid benefits and other earnings omitted by Census such as capital gains, both of which grew somewhat faster than wages and salaries.

Nearly half of bottom-quintile adults were of retirement age and receiving Social Security.

About two-thirds of the prime work-age adults in the bottom quintile were working. The almost one-third who were not working were receiving some combination of unemployment insurance, workers’ compensation, and relief payments, primarily from state and local government.

By 2017, about the same proportion of the bottom quintile was of retirement age, but they were now receiving both Social Security and Medicare. The

proportion of prime work-age adults who were not working had doubled, and they were receiving far larger transfer payments than the earlier generation. As a result, transfer payments in 2017 constituted 91 percent

At the same time, the bottom quintile benefited from a drop in its total tax burden from 19 percent of total...

In the middle quintile, growth in transfer payments and taxes almost offset each other for most of the seventy years, with taxes growing slightly faster until the 2008–2009 recession, after which the cumulate growth in transfer payments was faster.

The net effects of all these changes on the trend in income after transfers and taxes paint a very different picture from the one often claimed in political debates.

bottom quintile, with its substantial expansion in transfer payments and reduced tax burden, experienced faster real-income growth than any other quintile, 285 percent over the seventy years. Its faster growth did not begin until the War on Poverty programs started, however.

statistic called the Gini coefficient,

The combined effects of the 1993 and 2013 changes in the way the Census collected and processed data was to create the appearance of a rise in income inequality from 1947 to 2017 that was overstated by 42.1 percent—a published 22.9 percent increase versus a 16.1 percent increase in the Gini coefficients adjusted to remove the effects of the changes in methods.10 The published Gini coefficients are charted as a dashed

When the OECD data are adjusted to account for all government transfer programs, income distribution in the United States aligns closely with that in other developed countries.

Instead of applying its own published guidelines, the OECD attempted to justify the exclusion of Medicare and Medicaid by claiming that their inclusion would reduce the comparability with other nations that have government-paid medical care for all citizens.

With its Medicare and Medicaid exclusions, OECD seems to be making a value judgment that the United States should have socialized medicine and, since it does not, Medicare and Medicaid should not count as transfer payments. By any definition, they are and should be counted as transfers because they are government benefits targeted only to specific groups that meet income or age criteria, exactly like other programs that OECD does count.

The top 10 percent of households in the United States earn about 33.5 percent of all income, but they pay 45.1 percent of income-related taxes, including Social Security and Medicare taxes. In other words, their share of all income-related taxes is 1.35 times larger than their share of income.

That is the most progressive income tax share of any OECD nation. In Germany, the top 10 percent earn 29.2 percent of the income and pay 31.2 percent of income-related taxes, 1.07 times their share of income. The French top 10 percent earn 25.5 percent of the income and pay 28.0 percent of the income taxes, 1.10 times their share of income.24