Evidence Suggests Income Gap May Not Be As Wide As Some Claim

There has been much discussion regarding rising inequality in America. According to a Gallup poll, 67 percent of Americans are dissatisfied with wealth distribution today.

This issue has gained traction recently with the release of French economist Thomas Piketty’s book, Capital in the Twenty-First Century. Just last month, IVN author David Yee wrote an article asking if the continued economic inequality would “bring out the pitchforks.”

The common narrative nowadays is that the rich are getting richer while the poor are getting poorer, and that the top one percent are controlling an ever increasing amount of wealth.

In his article, Mr. Yee states:

“This is an argument that has been unfolding since the 1980s when the wealth/income gap started to make a strong resurgence after dropping or staying level for 60 years.”

While there are certainly compelling arguments to suggest that inequality has increased over the past few decades, there is also good evidence to suggest that such claims are misleading and exaggerated.

The Top One Percent’s Share of the Wealth

Back in 2004, Wojciech Kopczuk, an economist at Columbia University, and Emmanuel Saez, an economist at UC-Berkeley, published research outlining patterns in the top wealth shares from 1916 to 2000.

In their paper, the economists note that until the Great Depression, the top one percent controlled close to 40 percent of the wealth. However, that figured dropped 10 percent through the New Deal and World War II, and was down to 22.5 percent by the end of the 1940s.

In the 1980s, after minor fluctuations, the top one percent experienced slight increases as its share of the wealth went from 19 percent to 22 percent, which Kopczuk and Saez claim remained level through the 90s.

They concluded:

This evidence shows that the concentration of wealth ownership in the United States decreased dramatically over the century

Getting into what Piketty’s book focuses on, the twenty-first century, there is still little evidence of ballooning inequality. Economist Alan Reynolds analyzed the Survey of Consumer Finances put out by the Federal Reserve and found a similar trend.

According to the Fed data, the top one percent’s share of the wealth has remained steady between 30-34 percent since the 1980s, hitting 34.6 percent in 1995, but then receded the following year. In 2007 and 2010, the top one percent’s share of the wealth was 33.8 percent and 35.4 percent, respectively. In other words, the wealth gap has barely changed much since the 1980s.

Taxes and Government Transfer Payments

Even granting that inequality has increased slightly over the last few years, in an article for the Brookings Institution, economist Gary Burtless argues that data on the subject is misleading.

Though it has circulated that inequality has reached levels unseen since the 1920s, the only data set that goes back far enough excludes crucial information.

While not a big factor in the income picture in the 20s, government transfer payments are certainly a factor today. Burtless notes that in 1929, GTPs accounted for less than one percent of personal income, whereas today they make up 17 percent.

Transfer payments, along with taxes, play a huge role in reducing and evening out alleged income inequality. A 2013 paper by economists Bruce Meyer and James Sullivan claims that:

In general, accounting for taxes considerably reduces the rise in income inequality over the past 45 years

Some economists go even further to say that when we factor in all redistribution efforts and post-tax income, income inequality is not rising at all in the U.S.

The Shrinking Middle Class

One of the negative externalities frequently attributed to growing inequality is a shrinking middle class. Looking at Census data, it certainly appears that the middle class is shrinking, but perhaps for a good reason.

In 1967, 42.1 percent of American households were “middle class” with annual incomes of $35,000 to $75,000. In 2009, 32.2 percent of households were “middle class” — a 9.8 percent drop.

Similarly, the percentage of “lower-income” households also decreased during this time, changing from 43.6 percent to 36 percent.

However, the important thing to look at is the change in upper-income rates. Over the same time period, households considered “upper income,” taking in $75,000 or more per year, went from 14.4 percent to 31.6 percent, a 17.2 percent increase. The decrease in middle-income earners could well be explained by wealth gains within the income demographic, moving middle-income earners into the upper income level.

This gives at least some credence to what many call “voodoo economics” (supply-side).

This is consistent with a report from the U.S. Treasury Department which found that from 1996 to 2005, 56 percent of taxpayers moved into a different quintile, and 58 percent of people in the bottom quintile moved up into a higher quintile.

Middle-income taxpayers also experienced upward income mobility as 42.1 percent moved up to a higher income quintile over the same period of time. Clearly, despite the notion that people can’t get ahead anymore, income mobility is alive and well in America.

Are The Poor Getting Poorer While The Rich Get Richer?

Another common complaint in regards to inequality is that the rich get richer while the poor get poorer. Looking at Treasury Department data from 1996 to 2005, the income share for the bottom 20 percent did decline from 4.2 percent to 3.4 percent, while the top 20 percent’s income share went from 44.1 percent in 1980 to 50.4 percent in 2005.

At first glance, it is easy to jump to the conclusion that the rich have gotten richer while the poor have gotten poorer. The problem with those static comparisons is that because of income mobility, the people who were poor in 1996 were not the same people who were poor in 2005, so it’s apples and oranges.

Furthermore, the study also notes that the average income for the lowest quintile soared by 232.5 percent while the average income for the highest quintile only went up 26.2 percent. So while the poor’s income share went down, poor people overall got richer over time.

While the debate over inequality is far from settled, it would appear that there is a strong case to be made that the claims of ‘skyrocketing’ and ‘unprecedented’ inequality are greatly exaggerated.

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