Not Quite as Unequal as Advertised

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TaxProf Blog’s Paul Caron highlights an important point from a Wall Street Journal op-ed by Phil Gramm and John Early:

The published census data for 2017 portray the top quintile of households as having almost 17 times as much income as the bottom quintile. But this picture is false. The measure fails to account for the one-third of all household income paid in federal, state and local taxes. Since households in the top income quintile pay almost two-thirds of all taxes, ignoring the earned income lost to taxes substantially overstates inequality.

The Census Bureau also fails to count $1.9 trillion in annual public transfer payments to American households. The bureau ignores transfer payments from some 95 federal programs such as Medicare, Medicaid and food stamps, which make up more than 40% of federal spending, along with dozens of state and local programs. Government transfers provide 89% of all resources available to the bottom income quintile of households and more than half of the total resources available to the second quintile.

Teasing the direct wealth redistribution our government imposes on the economy out of the equation changes the picture dramatically.  Click over and look at the included chart.  Adding wealth transfers to those in the lowest quintile moves their average income from nearly zero to over $50,000, while removing taxation from the top quintile drops their average income from nearly $300,000 per year to less than $200,000.

This is a nifty trick from progressives that might just slip past folks’ notice or might be deliberately obscured.  Government takes action to correct a presumed problem but then doesn’t account for the correction in future years, so it looks as if the problem never changes.

In fact, it might appear to get worse!  In this case, for example, it wouldn’t be surprising to find that progressive taxation actually leads to a bigger difference between earned income (not including transfers).  After all, the higher taxes are, the more companies have to pay at the high end in order to produce the same take-home-pay, and the more progressive the tax structure is, the less incentive workers have to take higher paying jobs that carry more responsibility or require more investment in credentials and such, so the more pressure there will be to maintain or increase take-home pay.

If reducing the gap in earned income is really the goal (which I think it should be), then a redistributive tax structure is exactly the wrong way to go about it.



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