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December 12, 2018

What Income Inequality?

 

The crisis of rising income inequality has become an accepted fact in American policy discussions.

The clincher was French economist Thomas Piketty’s best-selling 2014 book, Capitalism in the Twenty-First Century. This searing indictment of capitalism alleged that because the rate of return to capital tends to exceed the overall rate of economic growth, the vast majority of wealth creation goes to those already wealthy, inevitably increasing inequality and political destabilization. Piketty believes the only solution is massive wealth redistribution through more steeply progressive tax rates.

But problems with Piketty’s work became almost immediately apparent.

Even a casual observation of the past 40 years has shown that the living standards of the poor and the middle class have improved dramatically as a result of the adoption of capitalism and global trade—especially in formerly socialist or Marxist countries.

And, as it turns out, numerous Piketty critiques and studies have demonstrated that using more realistic assumptions and definitions of income lead to different conclusions.

Most recently, Stephen J. Rose of the Urban Institute (not a right wing group) has published a study concluding that “common perceptions that all income gain went to the top 10 percent while middle class incomes stagnated (or even declined) are wrong.” Rose finds that, among many recent studies of income inequality, Piketty’s work is an extreme outlier, and almost all of the studies fail to measure properly. Rose concludes that:

  • Instead of stagnating, real median incomes grew by just over 40 percent from 1979 to 2014.
  • The top 10 percent of income earners gained 45 percent of income growth, rather than Piketty’s 100 percent.

Last October, Hoover Institution economist Russ Roberts stopped by IPI’s offices to give a talk on “Is the U.S. Economy Rigged in Favor of the Rich?” Russ did a Medium post capturing many of his arguments a couple of days before his IPI talk.

Russ points out that, when doing these kinds of calculations, it matters very much who you are counting, how you measure households, and whether you are looking at a person over the course of an entire life, or only at a snapshot in time. Russ concludes that “the standard story is more complicated than we’ve been hearing. Economic growth doesn’t just help the richest Americans.”

The U.S. already has a progressive income tax code. And the 2017 tax cut was specifically designed to limit its benefits to upper-income earners, as many of them are finding out. But we should be cautious about calls to make the tax code more progressive since income inequality seems to have been grossly exaggerated.


 

  • TaxBytes-New

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