Tag: Income

Inequality in America II – Income, Taxation and Spending

George Noga

Part II of our series, Inequality in America, focuses of inequality of income.

By: George Noga – May 8, 2016

  There are numerous and mind-numbing statistical methods for calculating income inequality. The Census Bureau alone reports the Gini coefficient, Theil index and MLD (mean logarithmic deviation). Many of these statistics do indeed show more inequality now than in past decades; however, peeking inside the numbers is revealing. Note: Most data herein are from US Census Bureau and BLS reports published in 2013-2014.

   By every measure extant, inequality rose more under Clinton than Reagan – Theil at double and MLD at triple the rate. The same is true with Obama’s first six years vs Bush 43. The Gini coefficient rose triple the rate under Obama; MLD rose 37% more; and Theil is up sharply while it fell under Bush 43. It is not a giant leap to deduce that most of the putative increase in income inequality results from progressive policies.

   Despite all the esoteric statistics, we really know very little about income inequality because all the data are – to use a highly technical term – crapola! Every study is fatally flawed by inconsistencies and limitations affecting source data; the major flaws are:

  1. Statistics are based on AGI (adjusted gross income) and not on all income. Much income is not included in AGI, such as contributions to IRA and 401(k) plans. AGI excludes the non-taxable portion of Social Security, EITC, Medicare, Medicaid and SNAP. Every one of these, if included in AGI, would significantly reduce inequality.
  2. Data use household instead of individual income. This renders all comparisons between time periods and income quintiles meaningless because the number of people per household changes over time and also changes between quintiles. For example, the number of one-person households has sharply increased in recent years (mostly in the bottom income quintile) making it appear there is more inequality among households even though, in reality, there is much, much less inequality among individuals.
  3. Quintiles are inconsistent. The top quintile has 3.2 people per household whereas the bottom quintile has 1.7; the income in the top quintile must be spread among twice as many people as the bottom quintile. It also means there are 25 million more people in the top quintile versus the bottom. Use of household data paints a deeply flawed picture of increased inequality between income cohorts – inequality that doesn’t exist.  
  4. Aggregate statistics don’t compare the same groups. Statistics showing inequality increasing over time don’t track the same people. New people (most poor immigrants) keep entering the back of the line, skewing all data downward. If they tracked the exact same people (and excluded new people), the data would show decreasing inequality.

   Does our tax system result in inequality? In one word, no. The US has one of the most progressive tax regimens in the world. Even Social Security and Medicare are somewhat progressive when taking (as should be done) the benefits into account. Moreover, increasing marginal tax rates on the wealthy would not result in their paying more in taxes – a principle well documented and even codified in Hauser’s Law.

   No discussion of income inequality would be complete without genuflecting to the so-called gender gap. However, economic analysis shows that the gap between incomes of men and women completely disappears when properly adjusting for level of education, type of degree, experience, hours worked and level of danger.

   The Census Bureau also reports data on spending by income quintile. The lowest quintile spends $2 for every $1 of reported income. Some of this comes from the underground economy – which logically is the province mostly of that cohort. If we were to gauge inequality based on actual spending rather than on fatally flawed measures of income, the effect would be a signal decrease in inequality in America.    

The next post in this series on May 15th addresses the $15 minimum wage.

How Government Destroyed the American Dream

George Noga

By: George Noga – Updated March 1, 2014

    In 1957 my parents paid $10,900 for a new median-price home. Their monthly payment including principal, interest, taxes and insurance was under $100. The house cost 1.5 years of my father’s income and the annual cost of ownership consumed less than 15% of income. We lived quite well without my mother ever working a single day.

     I graduated from high school in 1961 and went on to college. Most high school chums remained in Orlando, began work at entry-level positions, married, had children and bought homes. The wives stayed home as a second income was not necessary to own a home or to raise children. I kept in touch with many erstwhile high school classmates and often visited them in their homes. Following is the story of two such people, Steve and Sandy.  

The True Story of Steve and Sandy

    Steve and Sandy (their real names) were high school sweethearts who married following graduation. Steve was hired in the paint shop of the Martin Company. His starting wage of $2.00/hour soon was  increased to $2.25; including a little overtime, their family income was $5,000 per year. Less than a year after their marriage, they bought a new home; soon thereafter they had a daughter. Sandy did not work and stayed home to care for the baby.

    I visited Steve and Sandy frequently during summers. They bought and furnished a new median-price single family home in Orlando. They were able to accumulate the down payment and to furnish the home in less than one year with both working. Once Sandy became pregnant, she quit work as they were able to afford the cost of home ownership solely on Steve’s income. Their home cost two years of Steve’s income; their monthly house payment including principal, interest, taxes and insurance was under $100. They comfortably managed the cost of home and baby and never contemplated Sandy going back to work as it simply wasn’t necessary.

    Let’s fast forward 50 years to 2012 and to Steve and Sandy’s grandchild, Steve III. After high school Steve III earns at best $12/hour, or $24,000 per year. The median home costs 10 times his income and accumulating even a low 10% down payment would be daunting requiring years of saving. Even at low interest rates, the monthly nut would be $1,500, or $18,000 annually – nearly equal to Steve III’s take home pay. What possibly could account for such a dramatic change in only two generations? The answer in one word: government.

    The American dream is dead, thanks entirely to government that sucks the blood out of its citizens, i.e. the vampire state. For the first time ever, Americans believe the next generation will be worse off. In 1962 single-income families like Steve and Sandy were the norm; it was rare indeed for a married woman, especially one with children, to work outside the home.

  Within one generation (by 1985) two-income families became a majority. Now Steve and Sandy’s son, Steve Jr., was 50% likely to have his wife in the work force. Today, during the generation of Steve III, wives and mothers must work to keep the family afloat. How and why did these changes happen? Why is it necessary today for a family to have two wage earners merely to live as well as their grandparents once lived with only one wage-earner?

“Two-income families are a Faustian bargain; the second income

pays only for more government, i.e. more blood for the vampire.”

     The causes are many but all have a nexus to government. Fiat money and the abolition of the gold standard debased the dollar and devalued thrift and savings. Payroll and income taxes mushroomed and applied to ever more income. Property taxes rose exponentially. Regulation chokes growth and hidden taxes proliferate. Housing costs skyrocketed due to government growth management diktats such as concurrency, greenbelts, zoning, bureaucracy, regulatory delay, infill and anti leap-frogging to name only some of the culprits. The vampire state sucked out ever increasing amounts of blood – but it never is sated.

   We were hoodwinked and seduced; for a brief time ersatz prosperity seemed to follow the transition to two-income households. Yes, we could have a second car (albeit a necessity not a luxury for two wage earners) and an extra TV and a few other accoutrements. By the time people noticed the degradation in their quality of life, it was too late for a volte-face. Two-worker families are a Faustian bargain; the second salary pays only for more blood for the vampire. Families doubled the number of workers and received only fool’s gold in return. Are Steve and Sandy’s grandchildren really better off today than their grandparents?