Ask a Democrat and they’ll tell you America’s problems stem from increasing income inequality.
By their telling, all the growth and all the increase in productivity is just being stolen by the plutocrats. And we’re going to do something about this: We’re going to tax those rich folks and send the money to the poor to restore some order around here. Nearly every Democratic plan for the coming election would in some form take these supposedly ill-gotten gains and righteously redistribute them.
Of course, this is a simplification, but not by much. The real problem with these plans is that the underlying analysis isn’t true: The rich aren’t gaining much more of everything, and incomes for the likes of you and me haven’t actually stagnated. In reality, we have been increasing taxes and giving more money to the poor. This is outlined in a new paper authored by people who really understand these things. Here’s how it works.
Conceptually, there are a number of ways that we can measure incomes.
The most obvious one is what everyone gets in the first place, their nominal income. The second useful measure of income is the amount that everyone has after we change the distribution, so, post-taxes and post-transfers. The analysis of “rising inequality” the Democrats employ in pushing their policies depends upon us looking at the nominal incomes, the first measure that simply shows the sticker price on our incomes.
But that isn’t actually the important set of numbers. How people get to live is the logically important kind of inequality, not what they’re paid before our redistribution system kicks in.
It’s only after we measure the effects of taxes and welfare that we can understand what inequities remain in society — if any. Plus, any number used to justify more taxes and more welfare must measure the effects of what we do already to work out in terms of redistribution, to see whether we should do more or not.
The usual, nominal measure of supposedly starkly rising inequality comes from economists Thomas Piketty and Emmanuel Saez. Their figures were calculated by looking at tax returns, a useful source for sure. But if the tax laws change, then what appears on tax returns changes, too.
For example, the changes included in the 1986 tax reform were expressly designed to increase the numbers that showed up on peoples’ tax returns. It used to be that country club memberships, yacht clubs, and so on weren’t counted as part of income, weren’t taxed, and weren’t on tax returns. So, when we changed the law so they were counted, the incomes of those rich, as recorded, rose, while their real incomes didn’t. And their post-tax incomes definitely didn’t increase because now we taxed those benefits.
What this new study has done is gone back and looked again not purely at those initial market incomes but also what happened to them after taxes. It’s true that tax rates have gone down over the decades, but the definition of what qualifies as taxable income has expanded considerably.
Once we look at how people live, their actual incomes after everything we do to redistribute wealth, then we find that the rich’s share of wealth is much more reasonable than the nominal figures Democrats often cite would suggest.
That is, the entire argument for raising taxes on the rich in order to redistribute wealth is based on a myth: In reality, there’s been no great rise in income inequality, because we’re already taxing and redistributing more.
Of course, Democrats can still argue that we should do more redistribution anyway. But they ought to at least have to start from the correct numbers about where we are now. Unless, of course, running for office means that facts and reality don’t actually matter.
Tim Worstall (@worstall) is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
