Paul L. Caron

Thursday, March 22, 2012

Census Data: Inequality Is Linked to Education, Not Taxes

Tax Policy Blog, Census Data Shows Inequality Linked to Education, Not Taxes:

There have been a number of reports published recently that purport to show a link between rising inequality and changes in tax policy -- especially tax cuts for the so-called rich. The latest installment comes from Berkeley professor Emmanuel Saez, Striking it Richer: The Evolution of Top Incomes in the United States.  

Saez and others who write on this issue seem so intent on proving a link between tax policy and inequality that they overlook the major demographic changes that are occurring in America that can contribute to -- or at least give the appearance of -- rising inequality; a few of these being, differences in education, the rise of dual-earner couples, the aging of our workforce, and increased entrepreneurship.

Today, we will look at the link between education and income. Recent census data comparing the educational attainment of householders and income shows about as clearly as you can that America's income gap is really an education gap and not the result of tax cuts for the rich.

The chart below shows that as people's income rise, so too does the likelihood that they have a college degree or higher. By contrast, those with the lowest incomes are most likely to have a high school education or less. Just 8% of those at the lowest income level have a college degree while 78% of those earning $250,000 or more have a college degree or advanced degree. At the other end of the income scale, 69% of low-income people have a high school degree or less, while just 9% of those earning over $250,000 have just a high school degree.

... Census data also shows that in 2010, a worker with a high school degree made an average of $50,561, while a person with a bachelor's degree made an average of $94,207 -- 86% more. Someone with a master's degree made an average of $111,149 -- roughly 120% more. ...

This raises two questions for those who advocate for using the tax code to address inequality. First, how will higher tax rates on highly educated individuals make them less successful? And, how will taxing the educated rich somehow make the legions of workers with high school degrees more successful?

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Over 30 years ago, Dr. Christopher Jenks wrote a book entitled "Inequality". The book was based on truly exhaustive research on the topic of income inequality in the United States and his conclusion was that the single greatest marker of a child's future income status was the occupation of the child's father. As far as I know, nobody has seriously (i.e. with sound statistical data) challenged this finding. Jenks showed that 'high status' fathers, e.g. those with professional degrees and high incomes, afforded their children a statistically significant advantage in achieving an above average (often far above average) income in adulthood. Poor children have less opportunity to attain high status jobs because such jobs require significant educational expenditures which they are unable to make, or which they lately have come to make by burdening themselves with huge debts that will impoverish them in early and mid-adulthood. To be sure, there are exceptions to this scenario, but, in general, Jenks remains correct. (For example, he does not give sufficient weight to the mother's status and income because these were not as important years ago when he did his research.) With respect to the issue being discussed above, tax policy today serves to increase inequality because, as the income taxes of high status/high income fathers (and mothers) are reduced, their ability to provide educational benefits to their children is enhanced and the gap between these children and those who receive no such benefit from their parents grows wider. How could it be otherwise? How many children from low status/low income families can afford $1000 for an SAT prep course or personalized tutoring? With the top echelons of our government almost totally saturated and controlled by graduates of a few Ivy League colleges, what chance (other than via affirmative action and/or scholarships) do low status/low income college graduates have of obtaining leadership positions, such positions which, at least lately, appear to be filled by persons who support and implement tax policies which inordinately benefit their high status/high income peers ?

Posted by: Eddie Fellsen | Mar 23, 2012 12:15:43 PM

Human beings are not created equal.

Talents, abilities, and inclinations are not evenly distributed. Some people are smarter than others. Some people are more industrious. Some people have rare talents that the rest of us lack.

There is no way to rig things such that those of lower ability will do as well as those of greater ability.

Ultimately the left knows this, which is why they are so keen on stealing from those who can and giving it to those who can't.

Leftist ideology is nothing but the cosmic aggrandizement of petty resentments.

Life outcomes will ALWAYS be unequal because people are unequal.

Winners win,
Losers lose,
The mediocre muddle through.

Posted by: Lee Reynolds | Mar 23, 2012 10:34:05 AM

High tax rates cause income inequality. High tax rates lower the number of jobs in the economy and with more workers than jobs the employer does not need to pay the workers anywhere close to the economic value of their contributions. With more potential jobs in the economy than workers, employers must pay close to economic value added by each employee, or lose them to another employer. This can be demonstrated graphically. Start with the Laffer curve, tax rates on the horizontal axis and tax revenues on the vertical axis, add a size of economy curve by dividing the tax rate into the tax revenue, this yields a downward sloping curve intercepting the horizontal axis at 100% tax rate. This size of economy curve is a good proxy for the number of jobs in the economy. Add in a horizontal line representing the size of the work force. Where the number of jobs in the economy is less than the size of the workforce pay is low, where there are more potential jobs in the economy than the size of the work force then jobs will pay well, nearly up to the economic value added by the job.
When the employer does not have to pay an employee near the value of their labor, the employer gets high profits, the employer pays taxes on this at a high rate. Under low tax rates the employer makes a smaller profit, and pays at a lower tax rate, perhaps netting about the same. The workers take home a lot more money and with this money can invest, start their own business, or a two income family can become a one income family, with positive benefits to the children in the family.

Posted by: Dirk | Mar 23, 2012 10:05:30 AM

It's important to note these are HOUSEHOLD income numbers. The average worker with a bachelor's degree does not earn $94K, that's his/her avg HOUSEHOLD income.

willis: Nonsense, pretty much everyone in the U.S. can afford a bachelor's degree.

Posted by: TallDave | Mar 23, 2012 10:02:23 AM

When did it become the government's business to address "inequality?"

Assuming without conceding that the government has the right to use coercive taxation to improve the lot of the poor, the standard should be, "How are they doing?" If the goal becomes elimination of equality, we become Marxists.

Are we Marxists? If not, why are we having this discussion?

Posted by: S Neely | Mar 23, 2012 9:04:44 AM

OT to Mr. Caron's questions, but the chart looks like a Liberal's dream justification to make sure that everyone gets higher education.

I think we're already seeing the results of that.

I'd like to see the graph with a little more discrete data if possible:

• On those with less HS degree or less, break down between those working for someone else vs. self-employed.

• On Bachelor's and higher, break down between STEM and non-STEM degrees. Break down between all general majors (each division of STEM, Political Science, Arts, etc.).

• On Bachelor's and higher, break down between employer (government vs. private sector vs. NGOs vs. academia). I would lump educators at government run institutions in academia (YMMV).

Posted by: Squibob | Mar 23, 2012 9:03:46 AM

Yes, there is a correlation between education and income inequality. And I agree that factors such as poor or ineffective parenting. Since my wife teaches 7th and 8th grade math I have become aware of the attitudes of kids who feel they don’t need an education and the attitudes of their parents towards education. Many of those kids who have this attitude have parents with the same attitude.

Most likely these kids will NOT be willing to work towards good grades let alone be willing to work their way through college or even a technical skills college. Therefore these will be the adults that will fall in the lowest income brackets.

Many kids who don’t have the affluence to just go to college are working their way through college, because they know that having achieved a college degree, as a college professor told me many years ago at least shows you can be trained.

Posted by: Alan Boyd | Mar 23, 2012 8:56:47 AM

Of course, some will just deny the numbers. But the "rich" already already pay a massive amount of all income taxes. Naturally taxing them even more will solve all our problems, right? The socialist BS has never worked in the history of the world. But our kids haven't beem allowed to know that.

Posted by: Fred17 | Mar 23, 2012 8:56:44 AM

This is interesting and fun to look at, but education level is probably more of a marker of a successful person, and not the cause of said success. In other worse, people who aspire to get their Masters degree probably already have the work habits and intelligence that help them get ahead in their chosen field, and it's those traits that are responsible for their success, not the diploma.

Posted by: Ben | Mar 23, 2012 8:51:17 AM

The US already has one of the most progressive tax systems. and that understates things because other countries (especially EU) get a much higher fraction of their tax revenue from consumption taxes, which are much less progressive than their income taxes.

As points out, the EU countries actually reduce inequality through spending policy, not tax policy.

As to spending, I'll note that the US already spends as much per-person as the EU and a lot more than Japan. So, we've already got the revenue to reduce inequality. And we've already got the revenue for EU-level services.


One important question - the US gdp/person is significantly higher than that of EU countries. Is that due to tax and/or spending policy? If the former, how much GDP should we sacrifice doing something that doesn't reduce inequality?

Posted by: Andy Freeman | Mar 23, 2012 8:44:14 AM

"people with money can afford education."

True. What a pity there's no offering of free education in the United States, no scholarships for those showing ability and desire...

Oh, wait....

Of course, I've never heard anything except vaguely moralistic arguments about why "inequality" is bad.

And, "Anon 5:59:22", that's a ludicrous idea. "Government funding" (actually, wealth confiscated from productive people or borrowed from future generations) drives UP the cost of higher education. I'm amazed that we have price support programs that we *admit* increase the costs of goods, but when we do the same thing in other areas we're supposed to believe it reduces the cost!

Posted by: Rob Crawford | Mar 23, 2012 8:36:03 AM

Is it possible the link between education and income is a correlation for something else more subtle?

Posted by: Manos73 | Mar 23, 2012 8:21:43 AM

As between low-educated and high-educated, I'm guessing that level of education does statistically explain more of income gap than differential tax burden or even parents' differential tax burden. From having seen how the higher education financing system worked (at least 25 years ago, and remember, it's that kind of a time lag between a person's education and his peak earning years, however high that peak is), if a student was sharp enough, had solid enough leadership from family, friends, and school, and was willing to work and scramble hard enough, that student could in fact garner enough education from a sufficiently "prestigious" school to qualify as "highly-educated" by the time he hit 35, even with zero assistance from parents. But this is measurable: statistically, how does children's education vary with parents' income level? Within the highly-educated group, I'd imagine that tax policy does explain a greater proportion of observable income differential than education. But that may well be nothing more than the phenomenon of the long tail, which can be observed and measured in almost any field. If you decapitate more of the small group of ultra-achievers relative to the not-quite-so-high achievers, you're still going to have a long tail, but there won't be the distinction. And by the way, does the "income level" in the graph take into account only self-reported income, or does it account for non-cash government hand-outs, unreported cash income (a HUGE problem and one I see just about every single day an not just in my practice), and the like? What I'd really like to see is a graph comparing observable cash spending patterns versus education and tax burden.

Posted by: Countrylawyer | Mar 23, 2012 8:14:38 AM

So, exactly what college degrees got their holders relegated to the bottom income level ? Did they really need them ? Could those degrees be abolished ?

Posted by: Neo | Mar 23, 2012 8:10:37 AM

Why does anyone care what someone else earns? This is all jealousy.

If you want to make more, go work harder, get a degree (according to this graph) and quit complaining. Do you really think if you sit on the couch, sipping beer and cheering for your favorite American Idol contestant, your income is going to magically shoot up because you voted for Obama?

Posted by: Concerned Citizen | Mar 23, 2012 8:07:14 AM

Correlation does not imply causation. Getting a degree, especially a graduate degree, requires the same determination, motivation and drive that it takes to be successful later. So it's not necessarily the education that is the primary factor, it's the desire and ambition to succeed.

Posted by: scf | Mar 23, 2012 8:05:17 AM

Education is not the major factor that the author assumes for inequity in income. Education is just one of the results of the major factor -- making right decisions early in life.

Some people make the right decisions to achieve, which includes applying themselves to the fullest, while other people make the wrong decisions for success, for which laziness in school, disrespect for authority, and crime keep them from being successful. Success in life is more about choices than luck and wealth.

Posted by: Woody | Mar 23, 2012 7:45:52 AM

It would be interesting to see how those intersecting curves have shifted over time. My hunch is that both the red and blue curves have become steeper over the last 60 years.

Posted by: Mike Whitty | Mar 23, 2012 7:45:25 AM

Can we dig a little deeper and consider that inequality may be linked to a combination of poor or ineffective parenting, and education/economic systems which are both stifled by bureaucracy and the overburdening and complex regulations/taxation?

Posted by: L.E. | Mar 23, 2012 5:27:49 AM

i think the people over at tax policy blog are confusing cause and effect. people with money can afford education.

Posted by: r. willis | Mar 22, 2012 6:39:58 PM

Very odd posting. Because education is correlated with income, Mr. Hodge argues, income disparity has nothing to do with tax policy. What??!! Income is also correlated with home ownership. With not smoking. With taking yoga classes. With living on one of the coasts. How does this tell us anything about the relationship between tax policy and after-tax income disparity?

Is this really the best the Tax Foundation can do?

Posted by: Theodore Seto | Mar 22, 2012 3:41:18 PM

Maybe higher taxes and more government funding for education would enable the children of the poor and middle class to afford higher education.

Posted by: Anon | Mar 22, 2012 2:59:22 PM

While it's true that the educated earn more than the uneducated, education doesn't explain away inequality in the U.S.

There is huge inequality even after controlling for education, and much of the inequality is at the top--between the highly educated.

Law firm partners at top 5 firms making $2 million+ per year have the same law degree as criminal defenders making $30K.

Hedge fund partners and private equity titans have the same bachelors degree or MBA as middle class budget analysts.

Posted by: Anon | Mar 22, 2012 2:54:28 PM

I do not advocate higher taxes on anyone. However, to answer the two questions:

"First, how will higher tax rates on highly educated individuals make them less successful?"

By reducing their after-tax income, and after-tax wealth, and decreasing their financial incentives for working for that income and wealth.

"And, how will taxing the educated rich somehow make the legions of workers with high school degrees more successful?"

By providing more entitlement spending, direct wealth transfers, subsidized education, and so on.

Posted by: Jeremy LaMrouex | Mar 22, 2012 2:34:11 PM