NCPA - National Center for Policy Analysis


December 15, 2006

In a forthcoming Cato Institute paper, Alan Reynolds surveys a wide range of official and academic statistics, finding no clear trend toward increased inequality in the distribution of disposable income, consumption, wages or wealth after 1988.  The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1 percent's alleged share of something-or-other, he says.

Virginia's Democratic Senator-elect Jim Webb recently complained of an "ever-widening divide" in America, claiming "the top 1 percent now takes in an astounding 16 percent of national income, up from 8 percent in 1980."  Yet the statement is clearly false, says Reynolds:

  • The top 1 percent of households never received anything remotely approaching 16 percent of personal income (national income includes corporate profits).
  • The top 1 percent of tax returns accounted for only 10.6 percent of personal income in 2004.

However, even the growth from 8 percent to 10.6 percent is illusory:

  • More businesses began to file under the individual tax when individual tax rates came down in 1983.
  • This trend became a stampede in 1987-1988 when the business share of the top percentile's income suddenly increased by 10 percentage points.
  • The business share increased again in recent years, accounting for 28.4 percent of the top 1 percent's income in 2004.

The politically correct yet factually incorrect claim that the top 1 percent earns 16 percent of personal income appears to fill a psychological rather than logical need.  Some economists seem ready and willing to supply whatever is demanded.  And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution.  In Washington higher taxes are always the solution; only the problems change, notes Reynolds.

Source: Alan Reynolds, "The Top 1%...of What?" Wall Street Journal, December 14, 2006.

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