Commentary

Musky Income Myths

This article originally appeared in The Washington Times on February 8, 2004.

Democratic presidential candidates advocating really humungous tax increases — Howard Dean and Wesley Clark (until he withdrew on Feb. 11) — appear to have lost ground to two favoring merely enormous tax increases, John Kerry and John Edwards. It would seem to follow the latter two should rethink their plans before challenging the only candidate who thinks tax rates are plenty high enough, George W. Bush. Amazingly, however, the Democrats are pulling out the old “income inequality” card. It worked so well for George McGovern and Walter Mondale.

Business Week says Mr. Kerry and Mr. Edwards “believe a Democrat can repeal top-tier Bush tax cuts with impunity because income inequality has widened under Bush.” Taking a less partisan and more statistically defensible line, the Socialist Equality Party says, “Until the Bush administration, the Clinton years saw the greatest growth in social inequality in American history.”

Such claims suggest the top 20 percent, or 5 percent of families, have been collecting a rising share of “our” personal income — hence “income inequality has widened under Bush.” Any candidate who says that has to be lying. The latest available data on income shares is for 2001, and they show no increase in inequality.

The recession was no picnic for top earners: There were 690,000 fewer managerial jobs in 2002 than in 2000. If these cash income figures included capital losses, they would reveal ample pain among “the rich” in 2001-2002. The poverty rate did rise from 9.2 percent to 9.6 percent in 2002, but that was still lower than the poverty rate in any year from 1980 to 1998.

To defend President Clinton from socialist egalitarians, prolonged increases in real output per worker (like 1996-2000) translate into increases in real income per worker. Since there are typically two workers in top income groups and less than one full-time worker in the bottom income group, it is mathematically unavoidable that the gap between two-earner families and no-earner families must grow wider whenever the economy is doing well. Real median income among families with two full-time workers was 43.6 percent higher in 2001 than it had been in 1991 — an annual increase of nearly 4.4 percent a year. Families with no full-time workers did not do that well.

Most important, it is simply a statistical hoax to make long-term comparisons between the average (mean) income in any top income group with averages in lower groups. That is partly because the upper threshold on the group just below the top rises over time whenever real incomes in general are rising. As a result, increases in general prosperity mean incomes that once would have been large enough to make it into the top 5 percent no longer qualify.

Census figures say the top 5 percent collected 21 percent of all personal income in 2001, up from 20.3 percent in 1993. Measured in constant 2001 dollars, however, a family needed more than $164,104 to be counted among the top 5 percent in 2001, while anything above $136,539 would have qualified in 1993.

So long as that threshold kept rising, the share at the top was almost certain to rise, too. After all, an average of all income above $164,104 is almost certain to be larger than an average of all income above $136,539 simply because all incomes between those two figures were included in the top average in 1993 but excluded in 2001.

For the same reason, it makes no sense to compare long-term growth of average income in any top income group with growth below. Only the top group has no income ceiling, and the lower threshold defining membership in that top group rises whenever incomes in general are rising.

Because only the top group has no ceiling, increases in a small number of very high incomes (e.g., trial lawyers) can make the mean average in the top group rise much more than the incomes of typical members of that group. This is why it is considered misleading to refer to mean rather than median income as “average” in every other case, and why it is particularly misleading in this case.

Rising real income also raised the definition of the “middle class.” The lower and upper limits defining the middle three-fifths were $20,262 to $64,241 in 1975 (in 2001 dollars) and $24,000 to $94,150 in 2001. Periodic fables about the “vanishing middle class” miss the obvious: Those who “vanished” moved up.

The main reasons some families earn more than others are not as shocking as politicians would have you believe. Consider these horribly shocking Census Bureau facts about inequality:

  • Families with two people have incomes at least 3 times larger than families in which nobody works. Median family income in 2001 was $51,407. But that figure combines median income of $21,958 among families with no workers and $66,151 among families with two earners. Among married couples where both work full-time, median income was even higher — $76,150.
  • Mature, experienced employees earn at least 3 times as much as they did when they were young apprentices and trainees. Average family income was $16,014 among families in which the household head was younger than 24, but $45,978 when the household head was 45 to 54.
  • College grads earn at least 3 times as much as middle-school dropouts. For family heads with a bachelor’s degree, median income was $78,518; for those with less than a ninth-grade education, median income was $25,077.

If all this rampant inequality strikes you as grossly unfair, you should indeed consider electing politicians promising to do something about it. But they can’t really do much unless they promise to take money from two-earner families and give it to no-earner families, to take money from those who go to college and give it to those who didn’t bother attending a free high school, and to take money from those who are at an age where they’re trying to put the kids through college and give it to those in their early 20s.

The taking half of that policy is a reasonably precise description of who indeed would have their pockets picked under the tax plans of Messrs. Kerry, Edwards (and Clark). In whose pockets the expected booty would actually end up, however, is apt to prove as mysterious as figuring out what Mr. Dean did with all those millions he collected with Internet spam.

Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.