NCPA - National Center for Policy Analysis


November 13, 2006

Cato Institute Senior Fellow Alan Reynolds' new volume "Income and Wealth," assembles facts to explain and understand the myth that Americans are worse off because inequality of income has been increasing in the United States.  Using figures from the Statistical Abstract of the United States, Reynolds provides a clear guide to the countless academic studies on the subject, says Diana Furchtgott-Roth, a senior fellow and director of Hudson Institute's Center for Employment Policy.

There is a simple reason that the top fifth of households have more income, says Reynolds:

  • These households have more full-time earners and, with children, more people.
  • The top fifth looks better in terms of income, but it is not so much better when you adjust for the number of people per household.
  • Census data show that the top fifth has two income-earners per household, whereas the bottom fifth has fewer than one earner.
  • Those households depend instead on Social Security and transfer payments.

According to Reynolds:

  • Some 56.4 percent of bottom-quintile (fifth) households had no workers all year, not even a part-time worker for a few weeks.
  • These households include students, who have yet to enter the workforce, and retired people, who are living on saved assets. 
  • There are nearly six times as many full-time workers in the top fifth of the income distribution as in the bottom fifth.

In January, Congress will again consider whether to make the temporary tax cuts permanent.  "Income and Wealth," shows that perceived inequality is caused by institutional and measurement issues, and that raising taxes on some to pay for others will damage economic growth before it achieves equality, says Furchtgott-Roth.

Source: Diana Furchtgott-Roth, "Money Myths: Work Really Does Pay," Hudson Institute, November 12, 2006; and Alan Reynolds, "Income and Wealth, Greenwood Press, September 30, 2006.

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