TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, August 12, 2018

The Myth Of American Income Inequality

WSJWall Street Journal op-ed:  The Myth of American Inequality, by Phil Gramm & John F. Early:

America is the world’s most prosperous large country, but critics often attempt to tarnish that title by claiming income is distributed less equally in the U.S. than in other developed countries. These critics point to data from the Organization for Economic Cooperation and Development, which ranks the U.S. as the least equal of the seven largest developed countries. American progressives often weaponize statistics like these to urge greater redistribution. But the OECD income-distribution comparison is biased because the U.S. underreports its income transfers in comparison to other nations. When the data are adjusted to account for all government programs that transfer income, the U.S. is shown to have an income distribution that aligns closely with its peers.

The OECD measures inequality by determining a country’s “Gini coefficient,” or the proportion of all income that would have to be redistributed to achieve perfect equality. A nation’s Gini coefficient would be 0 if every household had the same amount of disposable income, and it would approach 1 if a single household had all of the disposable income. The current OECD comparison, portrayed by the blue bars in the nearby chart, shows Gini coefficients for the world’s most-developed large countries, ranging from 0.29 in Germany to 0.39 in the U.S.

But there are variations in how each nation reports income. The U.S. deviates significantly from the norm by excluding several large government transfers to low-income households. Inexplicably, the Census Bureau excludes Medicare and Medicaid, which redistribute more than $760 billion a year to the bottom 40% of American households. The data also exclude 93 other federal redistribution programs that annually transfer some $520 billion to low-income households. These include the Children’s Health Insurance Program, Temporary Assistance for Needy Families and the Special Supplemental Nutrition Program for Women, Infants and Children. States and localities directly fund another $310 billion in redistribution programs also excluded from the Census Bureau’s submission.

This means current OECD comparisons omit about $1.6 trillion in annual redistributions to low-income Americans—close to 80% of their total redistribution receipts. This significantly skews the U.S. Gini coefficient. The correct Gini should be 0.32—not 0.39. That puts the U.S. income distribution in the middle of the seven largest developed nations—the red bar on the chart. ...

When all transfer payments and taxes are counted, the U.S. redistributes a larger share of its disposable income than any country other than France. Relative to the share of income they earn, the share of income taxes paid by America’s high earners is greater than the share of income taxes paid by their peers in any other OECD country. The progressive dream of an America with massive income redistribution and a highly progressive tax system has already come true. To make America even more like Europe, these dreamers will have to redefine middle-income Americans as “rich” and then double their taxes.

https://taxprof.typepad.com/taxprof_blog/2018/08/the-myth-of-american-income-inequality.html

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Comments

This op ed is based on incorrect assumptions.

The assumption is that the OECD only reports income inequality before taxes and transfer programs.

The OECD also reports inequality after taxes and transfer programs.
https://www.oecd.org/about/publishing/41933898.pdf

Either way, the U.S. comes up as one of the most unequal countries, and actually one that does less than most to reduce inequality through taxes and transfers.

In the rest of the world, all citizens get healthcare provided by the government. In the U.S., very poor people get bad healthcare (medicaid) and middle class people get decent healthcare through their employers. So healthcare is actually more unequal in the U.S. than elsewhere.

Imagining inequality away won't make it so.

And if the U.S. is really so equal, someone will have to explain who all those people living in 60,000 square foot mansions and flying around in private jets are, and why there are so many homeless people sleeping in the public parks.

You don't see either for those things in Europe.

Posted by: Inequality after taxes and transfers | Aug 12, 2018 2:32:03 PM

"America is the world’s most prosperous large country."

Yes, technically, the United States is richer than the other large countries, which are all in the Third World: India, China, Brazil, arguably Russia.

That's not exactly setting the bar high in terms of competition.

Measured by median networth instead of by mean networth, the U.S. is actually one of the poorest developed countries.

https://money.cnn.com/2014/06/11/news/economy/middle-class-wealth/index.html

Why?

Because of inequality.

Posted by: low bar | Aug 12, 2018 2:38:47 PM

Inequality: "This op ed is based on incorrect assumptions. The assumption is that the OECD only reports income inequality before taxes and transfer programs."

The op ed is not based on that assumption, Mr. Troll. You seem to have trouble reading, it's stated very clearly:

Assumption: "The U.S. underreports its income transfers in comparison to other nations. When the data are adjusted to account for all government programs that transfer income, the U.S. is shown to have an income distribution that aligns closely with its peers."

Comment, sir?

Posted by: MM | Aug 12, 2018 7:27:15 PM

How important is this claim of income inequality? In a recent national poll, only 1% thought that the gap between rich and poor was the most important problem facing the country today. By contrast, 22% said illegal immigration.

Posted by: Woody | Aug 12, 2018 7:58:36 PM

Agreed. "Inequality" per se is of interest to people in word-merchant occupations. Such people are not interested in discussing 'inequality' of the sort which buttresses their status (and their convenience).

What we really need to address is the quality of public goods and services, deficits in security of various sorts which have their greatest impact on the lives of the impecunious, and the tolls placed on acquiring human capital. The intelligentsia and their dependents and hangers-on don't want to go there, because the answers are unacceptable to them.

Posted by: Art Deco | Aug 13, 2018 8:59:07 AM

Stop whining about "inequality". Inequality = opportunity, go out and earn more if you don't like it, instead of being a lazy bum. Redistribution is stupid, leave that for the commies. Don't like it? Move out.

Posted by: Stop whining | Aug 13, 2018 10:57:11 AM

" Inequality = opportunity, go out and earn more if you don't like it, instead of being a lazy bum."

Someone will have to explain how inequality, which causes children to grow up in polluted, dangerous neighborhoods with inadequate housing, low physical security, unhealthy food, poor education and poor healthcare while other people inherit billions which they plow back into political power enhances opportunity.

Who do you think is paying AEI to minimize inequality? Billionaires.

There have been studies of intergenerational mobility across income quintiles (i.e., social mobility).
https://www.oecd.org/centrodemexico/medios/44582910.pdf

There's less mobility in the U.S. than in most of the rest of the developed world. Only Italy and the UK have less.

But yes, if you're born into the top 5 or 10 percent, or maybe even the top 20 percent, the U.S. is a wonderful country full of opportunity.

If you're born near the bottom, heaven help you.

Posted by: Opportunity and equality | Aug 14, 2018 1:04:39 PM

It's not "your" money that you earned all by your lonesome and therefore have an exclusive claim to.

It's value created through the joint efforts of many members of society, through the use of infrastructure, legal systems, technology, and human capital developed through public investment and collective efforts.

If we dropped you in the middle of the Sahara desert all by yourself and left you to your own devices, you'd quickly die of exposure and dehydration.

You benefit from being part of society. You are only productive because of the environment.

The key question is how much of the benefits of joint production should go to a handful of people at the top who will spend the money on obscene luxuries, and how much should go to others who will spend it on more basic needs.

If you see no difference between spending a quarter of a billion on a mansion and feeding hundreds of thousands of malnourished children, then there's something wrong with your moral compass.

Posted by: Opportunity and equality | Aug 14, 2018 1:18:10 PM

"ou see no difference between spending a quarter of a billion on a mansion and feeding hundreds of thousands of malnourished children, then there's something wrong with your moral compass."

Think about how many starving children could be fed with all of the government dollars that have gone to law schools via federal student loans to create massive law grad oversupplies and historically low bar pass rates. Law schools do take in several billion per year in federal revenue, after all.

Posted by: Unemployed Northeastern | Aug 14, 2018 10:22:42 PM

Opportunity Troll: "It's value created through the joint efforts of many members of society, through the use of infrastructure, legal systems, technology, and human capital developed through public investment and collective efforts."

Which everybody has access to, yet some succeed in life and others do not take advantage of opportunities available to them. Maybe try addressing the facts of the article instead of meandering around with sophomoric arguments?

Good grief, when will these foreign bots go away...

Posted by: MM | Aug 15, 2018 10:16:23 AM

Someone will have to explain how inequality, which causes children to grow up in polluted, dangerous neighborhoods with inadequate housing, low physical security, unhealthy food, poor education and poor healthcare while other people inherit billions which they plow back into political power enhances opportunity.

If you and your ilk were the least bit concerned with the condition of 'dangerous neighborhoods' and 'low physical security', you wouldn't be devoting time and effort to undermining law enforcement and penal systems. And what happens when a school district makes a serious effort to sequester trouble-makers? Can we please turn those yutes over to detention centers run by the sheriff's department? Can we do it without facing years of litigation from the har-de-har public interest bar and their accomplices on the bench?

And it Beulah Slumdweller is feeding her family 'unhealthy food', it really is not anyone's fault but hers. We've reached a point in our history where all of 6% of disposable income is spent on groceries consumed at home, a point where obesity is inversely correlated with income, and a point where we've had grocery subsidies in place for 50+ years. You might quit trying to manufacture sob stories out of that sort of raw material.

Posted by: Art Deco | Aug 15, 2018 10:54:18 AM