Recent headlines claiming that the gap in income inequality in America is expanding are incorrect because in fact the gap has closed in the past two years, according to Richard Burkhauser and others at Cornell University. But with headlines like “The rich get richer through the recovery” (the New York Times) and “Some 95 percent of 2009-2012 income gains went to wealthiest 1 percent” (the Wall Street Journal), it's no wonder that the notion of growing income inequality is a hot topic for President Obama and other prominent leaders in the Democratic Party.
The principal research behind those headlines came from Emmanuel Saez, an economist at the University of California, Berkeley. Saez found that the top 1 percent of earners in America collected more than one-fifth of the total income earned in 2012, and the top 10 percent of earners collected more than half of the total income. Saez said rising stock prices and home values, as well as record corporate profits, have inflated the incomes of the wealthiest Americans, while high unemployment and stagnant wages have suppressed the incomes of middle-income and low-income Americans. The earnings of the top 1 percent returned to pre-recession levels in 2012. “These results suggest the Great Recession has only depressed top income shares temporarily and will not undo any of the dramatic increase in top income shares that has taken place since the 1970s,” he said.
But Burkhauser points to a fundamental flaw in Saez's work - failure to include in his analysis available data for government transfers, fringe benefits and changing household structures. “Researchers considering levels and trends in the resources available to the middle class traditionally measure the pre-tax cash income of either tax units or households,” Burkhauser said. “Focusing on tax units rather than households greatly reduces measured growth in middle class income,” Burkhauser added. The result is that “excluding the effect of taxes and the value of in-kind benefits further reduces observed improvements in the resources of the middle class.”
Another problem in the Saez analysis, according to Burkhauser, is that he miscounted capital gains by measuring taxable realized capital gains rather than measuring by accrual. By doing this, Burkhauser said, there is a dramatic reduction in “the observed growth in income inequality across the distribution, but most especially the rise in top-end income since 1989.”
It’s no secret that the wealthiest 1 percent of Americans have had an easier time since the recession ended in 2009, but then they always have an easier time of it because they have more resources to begin with. Using income inequality as a reason to advance punitive tax increases and expand burdensome regulations – all in the name of “fairness” – ignores evidence that income inequality has decreased since 1989.
Rather than focus on bringing down the wealthiest Americans, Obama and Congress should focus on lifting up the middle class and low-income Americans. Making one person poorer will not make another person more wealthy. Improving the economy so more good jobs are available will help everybody.