Too much equity is a bad thing

August 29, 2022. Income equality, not inequality, is the problem. Download file (below); read first four paragraphs (further below, italics), followed by a few readers' comments.

Income Equality, Not Inequality, Is the Problem - WSJ.pdf

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Contrary to conventional wisdom, the most dramatic and consequential change in the distribution of income in America in the past half-century isn’t rising income inequality but the extraordinary growth in income equality among the bottom 60% of household earners.

Real government transfer payments to the bottom 20% of household earners surged by 269% between 1967 and 2017, while middle-income households saw their real earnings after taxes rise by only 154% during the same period. That has largely equalized the income of the bottom 60% of Americans. This government-created equality has caused the labor-force participation rate to collapse among working-age people in low-income households and unleashed a populist realignment that is unraveling the coalition that has dominated American politics since the 1930s.

On these pages, we have debunked the myth that income inequality is extreme and growing on a secular basis by showing that the Census Bureau measure of income fails to include two-thirds of all federal, state and local transfer payments as income to the recipients and fails to treat taxes paid as income lost to the taxpayer. The Census Bureau measure overstates current income inequality between the highest and lowest 20% of earners by more than 300% and claims that income inequality has risen by 21% since 1967, when in fact it has fallen by 3%.

Our most significant finding from correcting the census income calculations wasn’t the overstated inequality between top and bottom earners. It was the extraordinary equality of income among the bottom 60% of American households, regardless of employment status. In 2017, among working-age households, the bottom 20% earned only $6,941 on average, and only 36% were employed. But after transfer payments and taxes, those households had an average income of $48,806. The average working-age household in the second quintile earned $31,811 and 85% of them were employed. But after transfers and taxes, they had income of $50,492, a mere 3.5% more than the bottom quintile. The middle quintile earned $66,453 and 92% were employed. But after taxes and transfers, they kept only $61,350—just 26% more than the bottom quintile.

Even these figures don’t tell the whole story. In the bottom quintile, there are on average only 1.92 people living in a household. The second and middle quintiles have 2.41 and 2.62 people respectively. After adjusting income for the number of people living in the household, the bottom-quintile household received $33,653 per capita. The second and middle quintile households had on average $29,497 and $32,574 per capita, respectively. The blockbuster finding is that on a per capita basis the average bottom quintile household received 14% more income than the average second-quintile household and 3.3% more than the average middle-income household.

For any reasoned analysis as to equal outcomes of income, the analysis must include all sources of income, e.g., government benefits, health insurance, AND all taxation reductions in income. This analysis reminds me of a WSJ op-ed piece several years ago by a business owner, explaining how the cost of an employee to the owner is about double what that employee takes home. As I pointed out repeatedly in my classes, this idea of taxing both the business employer and the employee for the right to provide and to receive a paycheck -- to pay someone to do meaningful work -- is perhaps the greatest mistaken tax policy of our day.

To reaffirm a related point I have often made, based on my teaching and research over the last twenty years of my career, the taxation policies imposed by the federal government, through income and social insurance taxes, provides great disincentives for people to work, resulting in people leaving the labor force, fewer people paying taxes, and more people receiving government benefits, paid for by the taxes collected from the employed. Add ten million now idle Americans -- not technically "unemployed," as they are not seeking work, and you increase incomes, reduce government wealth transfers and increase tax revenues.

Better yet, to another point I made years ago (and we are today witnessing the woeful result of not adopting this point), we needed to tax low-cost energy and "sinful" consumption while reducing taxes on work, namely "social insurance taxes." Today's news, of incredible increases in the cost of energy -- without producing any new tax revenue -- is the result of these progressive ideas of reducing fossil fuel availability and use and from the regressive "social insurance" taxation of work.