The Deceptive Impression Of Growing Income Inequality & Its Relationship To Income Mobility

"It is hard not to marvel at the audacity of a man, who after five years in office, identifies as, quote, 'as the defining challenge of our time,' an income gap that as you heard has steadily widened since he's been in office. But income inequality has long been a preoccupation of Democrats to the point that it sometimes seems they'd prefer everyone be equally poor than unequally rich."  Brit Hume's commentary on FNC following BO's remarks regarding income inequality @ the Town Hall Education Arts Recreation Campus (THEARC) in Washington on December 4, 2013.

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Talk about gaps in incomes – just look @ the above graphic that I first presented on November 15, 2007.   It shows the results of American prosperity, opportunity, & work ethic by matching the GDP of entire countries around the world with a U.S. state of similar GDP.  Russia's GDP is the size of NJ's & Ukraine's is the size of Idaho's.

Along with the above graphic I pointed out in 2007 that the claim that class warfare politicians like to make that there is rising income inequality in America is not true – certainly not in 2007.  This opinion is based on the results of a 10 year Treasury Department study, released on November 13, 2007, that started in 1996 using a sample size of 96,500 income tax returns.

The results of the study prove (along with other similar studies that go back to the 1960s) that the American economy is dynamic in that people move from one income quintile to another over time & then mostly upward.  For instance, of those in the second lowest income quintile, nearly 50% moved into the middle quintile or higher, & only 17% moved down.  Moreover, more than half (57.4%) of the richest 1% in 1996 had dropped to a lower income group by 2005. Some of these people might have been "rich" merely for one year, or perhaps for several, as they hit their peak earning years or had some capital gains windfall. Others may simply have not been able to keep up with new entrepreneurs and wealth creators.  Source of this analysis – WSJ.

Common sense tells you that someone whose earnings are in the highest income tax bracket in their later years of work will probably move to a lower level after retirement just as sure as someone in their 20s who starts for low pay will move into a higher category unless they are a real loser.  The point is that the rich are not the same people over time as the above analysis shows.  Class warfare politicians want you to think that the rich are always the same people & the poor are the victims of capitalism that should be pitied & need a government hand up (from them of course).

My own study of this subject over the years reveals that there is a difference between "the rich or wealthy" & people with earnings in the highest income tax brackets.  For instance, according to the Spectrum Group in 2007 there were 930,000 households in the U.S. with a net worth of greater than $5 million - these are the rich & there is no relationship to their wealth & the progressive income tax bracket they are in (multi-billionaire Warren Buffet famously reported that he paid income tax @ a 17% rate - check your income tax rate against his 17% to prove my point).  The people whose earnings are in the highest income tax brackets are not necessarily wealthy but rather are recently successful people, maybe about 40 years old, who are in the highest earning years of their lives.  These are the people that class warfare politicians want to tax into oblivion having them pay for every boondoggle earmark or government welfare program the politicians can think of - all the while calling out the inequities of "the rich" over "the poor".

It is the current opaque IRS income tax code itself that is the real inequity - being able to be legally manipulated so that multi-billionaires' income tax rates are lower than those of ordinary people.  This is just one more of the maladies that the FairTax corrects.  The FairTax is hard to avoid & being transparent (like your quarterly property tax bill) people see exactly how much of their money goes to government so that we wind up with just as much government as we really want.

Class warfare politicians like to say that the fruits of American prosperity are not being widely shared.  America is not about sharing but rather about opportunity.

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Just look @ the above table – it shows a tightening, not a widening, of the top & bottom income divisions.  Although the table shows huge positive changes in the lowest two quintiles, which is very good, many of you will remember that I was worried in 2007 about the small changes in the top 20% &10% as well as the negative changes in the top 5% & 1%.  I am for raising everyone's earnings through economic growth rather than concentrating on raising the minimum wage that BO is obsessed with.

As the Treasury data show, we shouldn't worry about inequality. We should worry about the people who use inequality as a political club to promote policies that reduce opportunity.

An upcoming post in the near future will analyze income inequality, including years after 2005, from the spending side rather than the income side.  The insight gained from the above primer on income mobility is essential for understanding why the concept of increasing income inequality is a myth.  The post will explain why this is true & what makes it happen - so fasten your seatbelts please.