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Inequality isn't what you think it is

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A good part of CEO incomes rising is simply because we've changed the way they're reported. (iStock by Getty Images)

Rising inequality is the great scourge of our times. We are supposed to believe that the Republic is quite literally rotting before our very eyes as the plutocrats take ever more and the rest of us sink into abject penury.

Of course, this does rather depend upon the idea itself being true, that we have some massive rise in inequality. And that isn’t as obvious as some seem to think. The abject penury most certainly isn’t there, that’s for sure. It’s still true that even the poorest Americans live better than most of current humanity and better than nearly any human before recent decades.

But as for the inequality, an excellent piece in Vox (yes, I know) explains the dispute. Without boring over details, the argument is exactly how we count what is going on. Should it be before or after tax? Before or after government policies created to reduce inequality?

Just those two will give us very different answers. Child poverty in the U.S. is usually listed at something like 20 percent of all children before we do anything, but more like 2 or 3 percent after government benefits are included. The decision of what we should be doing will differ quite substantially, depending upon which of those two numbers we start with.

With income inequality, the big argument is over how we treat or measure what is going to the top 1 percent. My own intuition (note, none of this is settled science as yet, we’re still arguing over how best to do this measuring) is that those arguing for the lower increase in this inequality are right. Instead of that top 1 percent now taking 20 percent of everything (the pre-tax number) or 15.7 percent (post-tax), the usual numbers being bandied about, the correct result is more like 10 percent, up from 8.4 percent before the supposed surge in inequality.

The difference is in the incomes of those high earners in corporations. These days, those in the C-Suite all get great vast salaries, stock awards, and bonuses. That’s what the higher numbers count. But that’s not enough, where was the money going before those salaries were so high? One answer is into higher stock prices, and back then the rich owned a larger portion of the stock market than they do now. If we add that back in, we get a much smaller change in the amount of the economy going to the rich.

However, there’s one more point we should add here. Much of the compensation to those C-Suite executives wasn’t being counted back then. There’s a bit in Barbarians at the Gate where it’s revealed that the Nabisco CEO has numerous country club memberships, multiple houses around the place, and a private air force, all paid for by the company. None of which appeared as part of his income, nor did he pay tax upon it all.

The 1986 tax reform changed all that. All benefits in kind became taxable for those high-flyers. Indeed, James Galbraith (Jr), largely the technical architect of the changes, has told me directly that this was the point: Insist that all CEO compensation be reported and taxed as such — As it has been since, and as explains a goodly amount of the rise in those reported incomes.

A good part of CEO incomes rising is simply because we’ve changed the way they’re reported. We now count everything, not just the cash. We also now tax everything, not just the cash. This is good by the way, it should be done this way. But as those previously untaxed perks become part of reported and taxed income, then reported income is going to rise.

All of which gives us something of a problem with the story of rising inequality, the 1 percent taking more and more of everything. It’s simply not obvious, when properly counted, that the story is even true, let alone causing all of the disasters and perils of the modern age. And if it isn’t true then we’d better get on with finding out what is causing it all.

We would like to avoid the perils, stop the disasters — but if they’re not being caused by the plutocrats, then what is?

Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.

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