The Misuse of Top 1 Percent Income Shares as a Measure of Inequality

October 17, 2012

Over the past couple of years, the concept of how disproportionate the top 1 percent's share of income is relative to every other individual has been overhyped. It marks an attempt to justify a tax hike on the highest income earners and larger transfers of payments those lower-income earners, says Alan Reynolds, a senior fellow at the Cato Institute.

Recent studies find little or no sustained increase in the inequality of disposable income for the U.S. population as a whole over the past 20 years, even though estimates of the top 1 percent's share of pretax, pretransfer (market) income spiked upward in 1986-1988, 1997-2000 and 2003-2007.

There are several reasons to dismiss the demonization of the top 1 percent.

  • The 23 percent growth of income for the top 1 percent between 1979 and 2010 includes the transfer payments and employer-financed benefits.
  • Estimates of the top 1 percent's share of income come from the pretax, pretransfer income, rather than the income after taxes and transfers.
  • Additionally, poverty and unemployment rates rise when the top 1 percent's share falls, and vice versa.
  • Furthermore, the top 1 percent incomes are sensitive to changes in the highest tax rates on income, capital gains and dividends. This means many estimates fail to account for the responses to changes in the highest tax rate on capital gains and dividends.

Many sources, including academic studies and data from the Congressional Budget Office and the Federal Reserve, show that income inequality may not be as bad as popular opinion may have a person believe. A lot of the data used to justify the popular notion that the 1 percent are getting richer look at the pretax and pretransfer income, which are unreliable methods for measurement.

Source: Alan Reynolds, "The Misuse of Top 1 Percent Income Shares as a Measure of Inequality," Cato Institute, October 4, 2012.

 

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