Democrats running for President are selling a narrative of growing income inequality that is being exacerbated by the Trump tax cuts, deregulation, a favoritism toward big business. There is what I call a political truism—the stronger the rhetoric, the weaker the factual foundation. The media rarely challenges these assertions or drill down to discover underlying facts. If it did, it would discover that the allegation contains a lot of sloppy work that embellishes the reality. Income inequality is not a myth, but the reality is not well defined, nor is how much is too much. If we can’t accurately answer those two issues, we’ll never find an answer.
Income inequality is inevitable and some forms are accepted without question. Gardeners make a fraction of what professional athletes make. So, what is the dividing line between acceptable inequality and unacceptable? Democrat candidates will never articulate an acceptable level but forcefully assert that today’s situation is unacceptable.
What do we know about income inequality and the underlying data?
In an article, Never Mind the 1 percent, Let’s Talk About the 0,01 Percent, Howard Gold makes the following points.” Some argue that income needs to be distributed more equitably, while others say governments should focus less on taking actions that could inhibit top earners and more on addressing the reasons others aren’t as successful. … As the debate continues, members of the 0.01 percent continue on their course.” According to the Tax Foundation, about 1.4 million tax returns were filed by the top 1%, meaning that the top 0.01% represented about 14,000 returns. To qualify for the top 0.01%, someone needs to earn about $2 million annually.
Economists who have studied data pertaining to the top 0.01% whose income has risen faster than the rest of the 1% have concluded that they “are most likely benefiting from what economists call “skill-biased technological change”—the increasing return on certain skills in an economy driven by technology and globalization.” Under established theory, a shortage skills in-demand will raise the price of those skills. Professional athletes and celebrity entertainers would have little trouble exceeding the $2 million entry point. I doubt that Elizabeth Warren and her fellow confiscator candidates would openly advocate tax penalties on Tom Brady, Tiger Woods, Tom Hanks, or Angelina Jolie. It’s the other unnamed rascals that they are after, whoever they are. But that does nothing to improve the lives and well-being of those in the middle and low income categories.
Two major factors contributing to income inequality are technology and globalization. Technology contributes to economic growth by increasing labor efficiency. But it also makes some employees less employable as technology substitutes for labor. Training and education helps mitigate the adverse effects of technology. And, globalization obviously results in companies outsourcing some production because they can get goods at a lower cost.
Although income inequality is real, its extent is being exaggerated by data problems and analyses relying on that data. The Congressional Budget Office report, The Distribution of Household Income, 2014, provides a detailed examination of income inequality by assessing virtually all changes to after-tax government benefits. Government redistribution of hundreds of billions of dollars from taxes on the rich to low income households is minimized in discussions of inequality. It concluded, “Under the adjustments, the top 10 percent income share seldom strays more than 5 percentage points away from a century-long average of about 35 percent.”
In addition, Phillip Magness in his paper The Myth of Spiraling Inequality pointed to the impact of flawed and outdated statistics—”… the widely reported explosion of inequality in the past three decades is likely a myth built upon outdated and flawed statistics. … These problems are sufficiently severe that they call into question the accuracy of the century-long inequality pattern at the heart of the U.S. policy discussion.”
Although income inequality is not a myth, it is likely far less severe than asserted by candidates for president. Debate would be better served by focusing first on the accuracy of measurements, the quality of data used in assessing inequality, and realistic policies that can help to lessen it..