Commentary

Work Matters

This article originally appeared in the Washington Times, September 10, 2006.
Recent news provided yet another addition to Reynolds’ Laws: “If the headline of any major newspaper or magazine article refers to ‘inequality’ or ‘income gap,’ you can safely assume the statistics in that story will be at least 65 percent untrue.”

The Washington Post was kind enough to provide two inspiring examples on two consecutive days. Nell Henderson’s brief on the “Widening income gap” said, “The richest fifth of households took home 50.4 percent of all income, the largest share since the government began tracking the data in 1967.”

The trouble is that Census estimates for 2005 cannot be properly compared with those of 1992, much less those of 1967. And that leaves the statement 68 percent untrue and 32 percent trivial — much better than average.

The Census Bureau has made numerous changes in the way it collects income surveys, and the latest changes in 1993 were explicitly intended to capture a bigger share of the highest incomes. “A change in survey methodology in 1993 lead to a sharp rise in measured inequality,” explains the Economic Policy Institute (which has never been accused of conservative bias). Figures on income shares from 1967 to 1992 are not comparable to later figures; making such comparisons is a big mistake or a small fraud.

Ms. Henderson would have been technically right to say 50.4 percent is the largest share of pretax income going to the top fifth since 1993. But that would be nitpicking: The same figure averaged 49.5 percent since 1993, fluctuating up and down between 48.9 and 50.1 with no significant trend.

A second example, “Attacking inequality” by Sebastian Mallaby, confuses the number of households with the number of workers. That’s 100 percent wrong. He wrote: “Economic growth no longer seems to help the majority of workers; the proceeds flow to the top fifth or so of the work force.” Not so. Half the proceeds from work and savings (not counting taxes or transfer payments) flow to the top fifth of households, not the top fifth of workers.

“Work Matters” is a chapter in my forthcoming book, “Income and Wealth,” from Greenwood Press. Among much else, that chapter notes that Bureau of Labor Statistics surveys show an average of 0.6 workers per household in the lowest fifth, one in the second, 1.4 in the third, 1.7 in the fourth, and two in the top fifth. This is partly because there are many more singles in the lower-income groups (including students and widows), and many more two-earner couples with older children toward the top. There are 1.8 persons per household in the lowest fifth, but 3.1 in the top fifth.

The Census Bureau found that within the lowest quintile, the number of people who worked full-time all year in 2005 amounted to 3.2 million in the poorest fifth of households, compared with 9.3 million in the second fifth, 13 million in the third, 15.3 million in the fourth and 16.7 million in the top quintile.

That uniquely industrious top fifth — every couple with an income above $91,705 — accounted for 29.1 percent of all full-time, year-round workers. The top fifth surely accounts for more than half of all two-earner college-educated families over the age of 25. It should be neither a surprise nor complaint that they collect half of all income — before taxes. If work did not pay off, the top fifth would not work so hard to produce at least half the U.S. economy’s goods and services.

Mr. Mallaby’s venture into statistical politics was to advocate that “Democrats on the left and right ought to embrace” his advice. It would be unfortunate if they did, since that would reduce the two-party system to just one. Mr. Mallaby wants Democrats to eliminate the mortgage interest deduction and tax breaks for buying health insurance. But that is just the easy part.

The really big bucks — he hopes to “liberate about $180 billion a year” from docile and stupid taxpayers — would come from ending the postponement of taxes on interest, dividends and capital gains earned inside IRA and 401(k) plans, and similar plans for teachers, government workers and the self-employed. Mr. Mallaby implies these plans are now tax-exempt, but most are merely tax-deferred.

When you start taking money out of a tax-deferred savings plan to finance retirement (as you must at some point), the withdrawals are taxed like ordinary income at rates up to 35 percent — though much of the plan’s growth is from capital gains and dividends that would otherwise be taxed at 15 percent. If heirs inherit any unspent savings, they become liable for taxes when they withdraw funds.

Mr. Mallaby finds this “absurdly unfair,” so he proposes an absurdly unfair change in the rules of the game. The government has promised that if you set aside money for retirement they will not tax you until you need the money — so your financial tree has some chance to grow before the IRS starts to prune it. Mr. Mallaby advises Democrats to renege on this deal. That speaks well for his opinion of Republicans — as if they are much too honorable to lie, cheat and steal so blatantly.

Under the Mallaby system, everyone would be taxed each year on the “inside build-up” of every IRA or 401(k). Yet they would later be taxed again at regular income tax rates when they tapped whatever was left for retirement. That would be much worse than having no IRA and 401(k) plans at all, which means you would merely be taxed 15 percent on dividends and capital gains, with no extra tax at retirement. Were the Mallaby plan enacted, the entire IRA-401(k)-Keogh-403b edifice would implode in a mass liquidation, bringing the U.S. and world financial systems down with it. Precious little tax revenue could be collected from such a mess.

To be fair, any journalist capable of confusing the top fifth of households with the top fifth of the work force might be capable of being equally confused about tax policy. But it often seems to be the other way around — advocacy journalism comes first and the statistical camouflage is added as last-minute decor. Those compelled to advocate incredible policies seem equally compelled to dream up incredible income statistics as a rationale.

Alan Reynolds is a senior fellow and nationally syndicated columnist.