In the just-published issue of Regulation, I have a feature on Bidenology (also called “Bidenomics”) and its cousin “Trumpology.” The two assemblages of policies share a basic ideology of collective decision-making as opposed to private choices—which explains, or is explained by, the convergence between the Democrats and the Republicans (see “Is ‘Bidenomics’ Just ‘Bidenology’ or ‘Trumpology’?” Regulation, Fall 2023; pp. 30-36 in the Gutenberg version).
What I want to emphasize here is how the Democratic version of populism is based on a false evaluation of material equality. In my article, I cite the fascinating book by Phil Gramm, Robert Ekelund, and John Early, The Myth of American Inequality. I will review this book in the Winter issue of Regulation (out in late December), but my current Regulation article provides a peek:
People in the ambit of the Democratic Party show a concern for inequality and poverty in American society. This concern, however, is not well grounded in economic reality, and sometimes not in logic either. …
In reality, the actual degree of inequality and poverty in the United States is greatly exaggerated, as shown by the calculations of economists Phil Gramm, Robert Ekelund, and John Early in their recent book The Myth of American Inequality. Correcting the official poverty rate with other government data (such as transfer payments like food stamps and refundable tax credits, which are not counted by the Census Bureau as income received), they calculate that the poverty rate was down to 1.1 percent in 2017, less than a tenth of the Census Bureau published rate of 12.3 percent. (The latest Census Bureau figure is 11.6 percent.)
The poorest Americans are not as poor as they are assumed to be, nor the richest as filthy rich as rumored. The 1 percent of households on top of the income ladder starts at about $600,000 in pretax annual income. On average, those households pay 39.8 percent of their income in taxes, according to unpublished numbers provided by Early. By comparison, the average tax rates for the first four quintiles of income are 7.5, 14.1, 22.7 and 28.4 percent, respectively.
Reliable measures of inequality are, even among most of the 1‑percenters, a reflection of entrepreneurship, work effort, educational achievements, and individual freedoms such as marriage choices. The data presented by Gramm et al. suggest a quite reasonable degree of inequality in American society, even before the large government redistribution through transfer payments (essentially to the bottom and second quintile) and taxes (more than 80 percent of which are paid by the top two quintiles).
You’ll find more in my forthcoming review of the Gramm et al. book. This is just a trailer. And my current article on Bidenology covers much more than this topic: I lead you in the bowels of Bidenomics and Trumponomics.
READER COMMENTS
Roger McKinney
Sep 26 2023 at 9:48am
Inequality is the only economic argument the left has since the collapse of socialism in the USSR and Eastern Europe. Bit they ignore the fact that inequality was falling in the US until the rise of welfare in 1965.
But the left ignores all evidence and logic. Emotions are all they care about.
Pierre Lemieux
Sep 26 2023 at 10:18am
Roger: The role of the welfare state in the rise of earned income equality is a major argument in Gramm et al. In 1967, two-thirds of working-age able-bodied individuals in the bottom income quintile worked (were in the labor force); 50 years later, only one-third work. The welfare state, however, worked toward equalizing total income (including government transfers). Between the two first quintiles, the average income is now roughly equal.
Thomas L Hutcheson
Sep 27 2023 at 8:17am
Make work more attractive for low income people.
a) Keep telling the Fed that optimal inflation includes no recessions
b) Raise the EITC
c) Replace wage tax with a VAT
d) Let employers “dump” low wage employees onto an improved ACA.
Incentive matter.
Roger McKinney
Sep 27 2023 at 9:58am
Yes, I know. I was referring to the inequality crowds own statistics showing inequality was falling before the introduction of welfare then flatlined.
But I’m uncomfortable showing that welfare reduces inequality. While it does show that inequality is not as bad as the left claims, it reinforces the left’s argument for more welfare. I think we should focus on the fact that inequality was falling by their own measures until welfare.
Roger McKinney
Sep 27 2023 at 10:04am
PS, I haven’t read the book, but I wonder about confounded effects. Can we really separate the effects of welfare from those of the market that reduced inequality before welfare?
Pierre Lemieux
Sep 28 2023 at 5:21pm
Roger: The answer is yes. You measure the Gini coefficient (or whatever measure of inequality you want to use) for earned (or market) income and the Gini coefficient after redistribution. Another way to look at this is that redistribution flattens the distribution. Redistribution adds to the bottom (except if the effective tax rate is 100%) and subtracts from the top (except if the tax rate is zero).
What you are probably after (and which is true) is that the redistribution will decrease the level of total income (to be redistributed) compared to what it would have been otherwise. But the richer will still have less of and the poorer more more of it.
Craig
Sep 26 2023 at 2:46pm
“On average, those households (1% 600k in income) pay 39.8 percent of their income in taxes”
The problem with this is that for many business owners, not all, that business owner will have a facility that pays property tax which, while its a legitimately a deductible expense, its a tax paid before the EBIT line which misleadingly stands for ‘earnings BEFORE interest and taxes.
“Reliable measures of inequality are, even among most of the 1‑percenters, a reflection of entrepreneurship, work effort, educational achievements, and individual freedoms such as marriage choices.”
I agree and to expound here, by marriage choices I think women who work, bank 6 and bring home health benefits, that’s hot. Forget the bimbo.
Pierre Lemieux
Sep 26 2023 at 2:59pm
Craig: By marriage choices, I (as well as Gramm et al.) mainly mean homogamy. It used to be that (for example) a doctor would marry a nurse, with the effect that their household, even if the wife continues to work, would probably not be in the 1%. Now, he marries a woman doctor and they are likely going to end up in a 1% household. Meanwhile, the nurse will marry somebody at her level of income, and they are less likely to increase inequality.
Craig
Sep 26 2023 at 3:06pm
I think that is an excellent insight, my wife is an attorney. Her income and health benefits was a security blanket for my riskier entrepreneurial activities.
I’d suggest there’s still a major inflection point between one income households and two income households as well, just generally. So perhaps the nurse doesn’t land a doctor anymore, but if the nurse lands a male nurse or teacher, those two would likely still be in the upper middle class if both worked whereas if only one works, the likelihood is they would be middle class.
steve
Sep 26 2023 at 3:20pm
Query- Does this include all taxes or just income taxes? For some reason libertarians and conservative want to focus solely on those. I think it is reasonable to include transfer payments but then some of these also very by state. Also, when we discuss what one group pays in taxes, as a percentage, why do we rarely see it noted what percentages of income they also have? If we are going to have a complete picture should also include wealth IMO.
Steve
Thomas Hutcheson
Sep 27 2023 at 7:30am
Yes, often the wage tax is overlooked.
Pierre Lemieux
Sep 27 2023 at 9:11pm
Steve: On your first question, Gramm et al.’s data, estimated from government statistics, do include all taxes related to income at all levels of government, as well as sale taxes and property taxes. See Table 2.3 on p. 27 of the book, the sources of the table, and further explanations on the preceding and following page.
On your second question, earned income is, by definition, a return on capital, including human capital. Thus, by considering incomes, you automatically include wealth; and income is much easier to estimate than wealth. (See a numerical example in my review of Mark Mitchell’s Plutocratic Socialism in Regulation.)
David Seltzer
Sep 26 2023 at 4:03pm
Pierre: Able bodied workers in the bottom two quintiles are there because taxpayer transfer payments are a disincentive to look for employment. Benefits decline dollar for dollar when a recipient finds employment. A marginal tax rate of 100 percent could result from a loss of benefits that equal or exceed the earnings gain. The able-bodied recipient is acting rationally when they choose welfare benefits instead of employment.
Pierre Lemieux
Sep 27 2023 at 9:13pm
David: Yes, of course. The average government transfer (all levels of government, including benefits paid in kind such as Medicaid) of households in the first quintile is $45,000 per year.
Thomas L Hutcheson
Sep 26 2023 at 5:30pm
Personally, I’m more concerned with other flaws of the tax system more than its inequality.
a) taxes income rather than consumption
2) taxes business income
3) uses a tax on wages rather than a VAT to transfer consumption among people in different life circumstances (age, health, unemployment disability, child rearing)
4) does not tax net emissions of CO2 and methane at all
5) subsidies the charitable contributions of higher income taxpayers at higher rates then of lower income taxpayers
6) does not tax the implicit income of homeowners and what employers contribute to employer-purchased health insurance.
7) does not collect enough revenue to reduce the full employment deficit to near zero
If the system did those things the percentages of income collected shown don’t seem bad but since some consumption is just of positional goods, why wouldn’t more progression be a little better?
David Seltzer
Sep 27 2023 at 10:44am
Pierre: In this morning’s news, Biden stood with UAW strikers, exhorting them to “stick with it!” A real world example of de Jasay’s government, The State, using its power to satisfy its electoral clientele. Reprehensible!
Jose Pablo
Sep 28 2023 at 8:10pm
Reprehensible!
Why reprehensible?
The incentives in democracy are “designed” to work precisely like that.
What is “intellectually reprehensible” is expecting the government to behave otherwise in a democracy.
I wouldn’t expect “angels” running for President.
David Seltzer
Sep 29 2023 at 11:41am
“Why reprehensible?” Fair question Jose. My condemnation is, subjective. Why? because Biden has chosen to advocate on behalf of the few at the expense of the many. If not condemnation, at least censure. Obviously those UAW strikers have monopoly power and don’t find that reprehensible. Thanks for the post. It helps me think through difficult economics.
Jose Pablo
Sep 28 2023 at 8:47pm
Why is “equality” considered to be “intrinsically good”?. It does not make any logical sense.
http://www.owl232.net/papers/equality.htm
Jose Pablo
Sep 28 2023 at 9:03pm
It looks more like (another) excuse of the “government mob” to justify taking your money by force.
Doing this shouldn’t be more legal for the government than it is for the mafia. The difference in the legality of what is, basically, the same “action” is just intellectually arbitrary.
Justice should be blind to who is committing the same kind of robbery (taking your money using the threat of violence) the government or the mafia.
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