How to Think about Inequality

April 4, 2012

The 2012 presidential election promises to place greater emphasis on income inequality than any election before it.  President Obama has stirred significant class resentment as those in lower income brackets focus on alarming statistics suggesting a growing income gap, say Peter Wehner, a senior fellow at the Ethics and Public Policy Center and a managing director of e21, and Robert P. Beschel, Jr., a political scientist currently based in the Middle East.

  • In studying income growth between 1979 and 2007, the Congressional Budget Office (CBO) found that income grew by 275 percent for the top 1 percent of households.
  • This figure was just 65 percent for the next 19 percent of households, slightly under 40 percent for the next 60 percent, and 18 percent for the bottom 20 percent.
  • Looking more closely at the mega wealthy, the study found that the top 0.1 percent saw their real incomes rise more than 400 percent from 1979 to 2005.

These facts became a rallying cry for the Occupy Wall Street movement, calling for equalization.  However, the inequality debate needs to be reframed before policy decisions can be made.  Specifically, it must be understood that the income gap is not nearly as significant as these facts make it appear.

First, while these figures track aggregate income movement, they fail to account for individuals who are able to move between groups -- a strong sign of social mobility.

  • About half of those in the bottom income quintile in 1999 had moved to a higher income group by 2005.
  • Furthermore, some 30 percent of taxpayers in the top income quintile in 1996 had fallen to a lower quintile by 2005.

Second, the comforts enjoyed by the middle and lower classes have expanded rapidly with technology.  Air travel, good cheap food, the Internet and better health outcomes are equalizing forces between those with disparate incomes, and they are not captured by the above-mentioned findings.

Third and finally, the current U.S. tax structure has contributed strongly to income equality.

  • According to CBO, the top 1 percent of earners now pay 40 percent of all federal taxes, compared to less than 20 percent in the 1970s.
  • According to the Organization for Economic Cooperation and Development, income taxes in America are the most progressive among the rich nations of the world.

Source: Peter Wehner and Robert Beschel, "How to Think about Inequality," National Affairs, Spring 2012.

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