Debunking Myths About Inequality

May 20, 2014

Much of today's debate over inequality is filled with inaccuracies, writes Michael Tanner, senior fellow at the Cato Institute.

A common political narrative today is that America's rich continue to get richer while the poor become poorer,  leading lawmakers to call for higher taxes and increases in the minimum wage. But there are a number of fictions surrounding the inequality debate. Tanner debunks some of those myths.

Myth 1: Inequality has never been worse.

  • The distribution of wealth in the U.S. has been relatively stable over the last several decades. In 1965, the top one percent of Americans held 34.4 percent of the country's wealth; in 2010, that figure was at 35.4 percent.
  • Moreover, many statistics purporting to show inequality do not take into account welfare transfer payments, which have a serious impact on net income. Taking those into account, a Brookings Institution study reveals that income inequality actually decreased from 2000 to 2010.

Myth 2: The rich inherit their money.

  • Actually, 80 percent of American millionaires are the first in their families to become millionaires.
  • For the richest one percent of Americans, only 15 percent of their wealth is from an inheritance. Rather, wage income is responsible for the majority of wealthy Americans' net worth.

Myth 3: The rich stay rich, while the poor remain poor.

  • While some families are wealthy for generations, research indicates that up to 70 percent of a successful entrepreneur's wealth is lost by the end of the second generation in the family.
  • Moreover, close to 56 percent of Americans in the top income quintile will drop out of it within two decades, while half of Americans who begin in the bottom quintile move up to a higher quintile within just one decade.

Myth 4: An increase in inequality means an increase in poverty.

  • There is very little correlation between poverty rates and inequality. The economy is not a fixed pie, and a gain by one individual does not mean that another incurs losses.
  • While the link between inequality and poverty is tenuous, Tanner does note the link that exists between a person's choices and resulting poverty. For example, high-school dropouts are 3.5 times more likely to end up in poverty than those with a high-school education. Similarly, less than 3 percent of full-time workers live in poverty.

Source: Michael D. Tanner, "Inequality Myths," Cato Institute, May 14, 2014. 

 

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