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Saez and Zucman note in passing what we all know—namely, that low-income people pay taxes out of their transfer payments19—but they continue to fail to count transfer payments as income, vastly overstating the average tax rate paid by the lower end of the income distribution.
Again, the reason for the difference is primarily what Saez-Zucman count as income. For the lower part of the income distribution, they choose not to count the largest part of the actual income individuals actually received—namely, transfer payments. At the higher end of the distribution, Saez and Zucman decide to count fictional amounts that the households never received as income.
They estimate how much assets held by individuals might have appreciated. These assets may include stock, mutual funds, retirement accounts, art collections, or homes. Then they count that amount as if it were income, although the asset owners cannot use it for consumption, savings, or paying taxes because they never received it.
In 2013, Thomas Piketty published his Le capital au XXI siècle (Capital in the Twenty-First Century).20 Piketty and his book became something of a sensation in part because the book gave a justification to those seeking to expand dramatically the role of government. Piketty claims to have discovered new mathematical laws about the behavior of inequality that applies across all times and nations. His general thesis is that major dislocations of the first half
decline in inequality, which was then reversed during the second half of the twentieth century. In his telling, inequality of wealth and income in the last half of the twentieth century and thus far in the twenty-first is reaching new extremes and is destined to be even greater.
The empirical evidence that he uses to support this thesis with respect to income inequality in the United States is the same used by Emmanuel Saez, who has often collaborated with Piketty in his research.21 The Piketty income data do not include transfer payments, which make up a majority of the income of the bottom 40 percent of the population. His data also overstate the income of higher-income individuals by imputing to them income such as unrealized capital gains, which they do not actually receive.
and imputes income that was never received to
As already shown in Chapter 4, when all transfer payments are counted as income to the recipients and income is measured conventionally in terms of payments actually received and retained after taxes, income inequality is lower today than it was in 1947.
The distribution of income at any point in time is often discussed as if people were assigned to a particular permanent place in the rank order of incomes. But an income distribution is a snapshot of a point in time, and as soon as it is measured, people’s choices and broader economic dynamics immediately begin changing their positions in the distribution. These changes in income are typically called income mobility.
Many came as indentured servants, including George Washington’s grandmother, to pay off the cost of their passage, and some were brought as slaves.
Between 1880 and 1900, Black wealth per capita increased substantially, and the ratio between Whites and Blacks in terms of wealth decreased by more than half.2 Jim Crow laws impeded significantly, but could not stop, the progress made by Black families in the last twenty years of the nineteenth century.
Cornelius Vanderbilt was the descendent of a Dutch farmer who immigrated to America in 1650 as an indentured worker. His father was a working man of limited means who ran a ferryboat in New York Harbor.
His great-great-granddaughter, Gloria Vanderbilt, died in 2019 at the age of ninety-five and left her son most of her estate valued at less than $1.5 million, only about 0.002 percent of the value of the business Cornelius Vanderbilt created.
This freedom of individuals to build human capital and, thereby, increase their earning power is a critical element in fulfilling the American dream of rising income.
Most notably, this chart shows that for 2017, in addition to the top quintile, the entire fourth quintile and about 18 percent of the middle quintile all earned real incomes that would have been in the top quintile 50 years earlier in 1967.
This means that 44 percent of all households in 2017 had incomes that were earned only by the top quintile fifty years before. In 2017, 58 percent of the middle quintile had earnings that were in the fourth quintile in 1967. More than a third of second-quintile households in 2017 earned what middle-quintile households earned in 1967. Although 77 percent of the bottom quintile in 2017 still earned at the bottom-quintile rate for 1967, that still means that 23 percent of those
The bottom line of this Treasury research was that, on average, individuals’ income rose 24.1 percent from 1987 to 1996 and 41.0 percent from 1996 to 2005. (More detailed results from these studies are contained in Appendix E.) Those increases were almost two times and more than three times greater, respectively, than the official Census estimates for personal income increases of 12.7 and 12.4 percent for the same two time periods.
Why did the Census measure miss the growth of income actually experienced by individuals? An analogy may help explain. Suppose you measured the height of all the students in an elementary school and found that they averaged fifty inches tall. The next year you go back and measure the students’ height in the same school and find that the average is still fifty inches. You would not conclude that none of the students had grown because you know that after a year of growth, the fifth graders moved on to middle school, fourth graders with their year of growth were promoted to fifth grade, and new
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Yet the Census numbers are cited to make implausible claims that people have not gotten a raise because folks with the most experience and human capital have retired and new workers without that experience have arrived.
The Census numbers do not measure individual income raises, just like the average height of all elementary students does not measure whether individual students have grown. That is an inherent feature of the way the data are computed.
forty-eight inches would not mean any children shrank. But that is an exact analogy to what happened in the 1987–2005 time period in the labor market. New, less skilled workers were arriving at two to three times the rate that the older, more skilled ones were leaving.
The income for the bottom quintile rose about 250 percent in the first decade and 285 percent in the second. The second quintile rose only about one-quarter as much, and the middle quintile rose still less. For the fourth quintile, real income increased by less than 16 percent. For the 1987–1996 time period, the top quintile rose even more slowly, increasing by less than 10 percent. The exception was the 25 percent increase for the top quintile for 1996 to 2005, which was greater than for the fourth quintile, but even then, the top 1 percent still posted the smallest increase of all groups.
One of the important conclusions of the Treasury Department’s study was that despite advocates’ claims that economic mobility had declined, “An examination of the various cells suggests that income mobility was approximately the same in almost all income groups during these time periods [1987 to 1996 and 1996 to 2005].”
“Tracking individuals’ incomes over time gives a startlingly different view of the forces shaping America’s income distribution. The conventional view leads us to think [people in the bottom quintile] were worse off in the 1990s. Nothing could be further from the truth.”13 The Treasury report provided some additional details
For children reared by parents in the bottom income quintile, 93 percent grew up to have more real income than their parents. Fewer than 7 percent did not. Many of these children and their parents worked hard to attain greater levels of education and acquire skills that allowed them to increase their earnings. But even for the considerable number who failed to complete high school or acquire additional skills, their incomes rose as a by-product of strong economic growth. These results are an extraordinary testament to the dedication of many parents, the efforts of the new generations, and the
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They claim, for example, “Blacks have a harder time exceeding their parents’ family income … than whites.”24 But their own data show that is true only for the second quintile.
that the first bias comes from ignoring how consumers continually improve their well-being by substituting items that become relatively cheaper for those that have become relatively more expensive while maintaining the same level of spending.
While the total substitution bias in the Consumer Price Index (CPI) is small in a single year (an average of 0.5 percent per year for the last fifty years), official government data show that from 1967 to 2017, this bias caused the basic CPI-U to overstate inflation by 31.6 percent.
Cadillacs and Rolls-Royces of the crème de la crème in 1967 broke down ten times more often than the Ford owned by a bottom-quintile family in 2017. The Ford will also last twice as along and be four times safer.
Eating food away from home at a restaurant where somebody else prepared the meal was a hallmark of a high-income lifestyle in 1967. In the mid-1960s, households in the top quintile spent 27 percent of their food budget on food away from home. But by 2017, the average bottom-quintile household spent 34 percent of its food budget away from home, far more than the top quintile did in the mid-1960s and more than even the top 1 percent did.
The difference is sometimes called an “earnings gap.”14 The “gap” was actually reversed for Asian households, which on average earned 38.5 percent more than White households. Hispanic households earned 17.7 percent less than White households. The following discussion identifies some of the reasons for these differences based on data available from the Census’s Current Population Survey (CPS).
Historically, one of the major contributors to the Black-White earning gap was geography. Black workers disproportionately lived in the South, and the South, on average, had lower pay scales for most jobs, so the national Black-White disparity was in part a reflection of that geographic difference.19 Over time, however, this relative Black concentration in the South has become smaller, and economic differences among regions have also become smaller. As a result, the effect of geography on the Black-White pay gap has largely disappeared and in 2017 accounted for only about 1 percent of the
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The Founders’ view seems to have been captured by historians Will and Ariel Durant in their Lessons of History: “Nature smiles at the union of freedom and equality in our utopias. For freedom and equality are sworn and everlasting enemies, and when one prevails the other dies. Leave men free, and their natural inequalities will grow almost geometrically.”
The Enlightenment affirmed labor and capital as private property, not communal property to be shared with the crown, church, guild, and village. The concept of labor and capital as private property, protected from leeching by communal “stakeholders,” was the fundamental economic contribution of the Enlightenment upon which the modern world was built.
Democracy, which Plato had seen as “a bazaar of constitutions and charters,” was to him the most attractive
state among the options that actually existed, but he believed that it was unstable.
Envy and the lust for equality made it unstable and prone to tyranny and dictatorship.
Through what Abraham Lincoln called “an open field and a fair chance for your industry, enterprise, and intelligence,”
but it has also shown that the explosion of transfer payments following the War on Poverty has caused a significant number of prime work-age persons to become detached from the economy.
Ironically, President Joe Biden, House Speaker Nancy Pelosi, and Senate Majority Leader Chuck Schumer all proclaimed in the fall of 2021 that their proposed monthly child tax credit costing $1.6 trillion over a decade would “cut child poverty in half.”8 They were, by definition, absolutely wrong.
The official poverty rate does not count the refundable portion of tax credits as income, even though the benefits are paid with a check from the Treasury. And the same mismeasurement problem also invalidated their original claim that the transfer payments were needed in the first place owing to high childhood poverty. That claim was invalid because the official child poverty rate was five times larger than it would have been had the Census merely counted all transfer payments as income to the recipient—only 3.1 percent versus the official 17.5 percent.9
Income inequality has fallen, not risen,
Poverty has declined dramatically and almost disappeared, not remained largely static for half a century as Census data show.
The vast improvement in economic well-being during the last half century has been broadly shared across race, ethnicity, gender, and region, not just enjoyed by the privileged few.
The administration and majority leadership in Congress were calling for huge additional increases in federal transfer payments on top of an unprecedented 45 percent increase in 2020.10
the official statistics for median household income showed a 2.9 percent decline, which suggested that all that big spending didn’t help those households that received the transfer payments.
So, for the first time ever, in the same publication alongside the official numbers, the Census Bureau issued a second set of estimates that included the types of transfer payments that the government had been making all along but that Census had never counted before.
Legislation should mandate that the statistical agencies count all earned income, including capital gains and all employer-paid benefits like health insurance premiums and employer contributions to worker retirement plans.
free services to low-income households such as free community clinics.
In the bottom two income quintiles today, eighteen million prime work-age adults live in whole or in significant measure on government transfer payments.
