NCPA - National Center for Policy Analysis

Debunking Income Inequality Myths

January 27, 2015

Income inequality may be a popular topic, but it's also one that's largely misunderstood. Rachel DiCarlo Currie, a senior fellow at the Independent Women's Forum, explains the state of income inequality in America and debunks some popular misconceptions about the distribution of wealth in the United States.

Currie identifies three common beliefs about income inequality:

  • Since the late 1970s, middle-class incomes and living standards have stagnated.
  • Social mobility has declined.
  • The United States has far worse income inequality than does Western Europe.

These conceptions may be popular, but are they accurate? Not quite, says Currie. As for incomes, according to the U.S. Census Bureau, median household income in 2013 was only 6 percent higher than it was in 1979. However, those figures only look at pretax income -- ignoring government welfare transfers, capital gains and employer benefits such as health insurance -- and they aren't adjusted for changes in household size. Using Congressional Budget Office data that does take into account household size, tax credits, government transfers, capital gains and employer-provided benefits, median household income increased 47 percent from 1979 to 2011. Significant gains took place among middle-income earners, with incomes rising 35 percent to 45 percent.

What about social mobility? Despite rhetoric, it's stable: people are still moving up the income ladder, and a 2014 study found that mobility has been stable for decades, despite increases in income inequality. However, Currie does identify one area that is responsible for sluggish income growth: the drop in the marriage rate. A study from Robert Lerman and Brad Wilcox found that median family income growth between 1980 and 2012 would have been 44 percent higher if the married parenthood rate had remained stable.

While a 2011 study from the Organization for Economic Cooperation and Development identified higher income inequality in America than its Western European peers, Manhattan Institute Senior Fellow Scott Winship determined that, ignoring that top 1 percent of households, income inequality in the United States is equal to that in Europe. Moreover, Currie notes that family breakdown is much more prevalent in the United States.

Lastly, raising taxes on high earners is not the answer. If lawmakers want to improve mobility and opportunity in America, they should focus on improving the country's economic environment. She suggests supporting apprenticeship programs, reducing burdensome occupational licensing requirements, expanding the Earned Income Tax Credit and eliminating marriage penalties.

Source: Rachel DiCarlo Currie, "Understanding Income Inequality," Independent Women's Forum, January 22, 2015.

 

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