Today, the day after Thanksgiving, is the busiest shopping day of the year. From everything we’ve read about America’s inequality, we might assume that the top 20 percent of American households are out shopping while the dwindling middle class and the bottom 20 percent are staying home.
Last month, in a speech in Pittsburgh to the United Steelworkers, House Speaker Nancy Pelosi declared, “We’re talking about addressing the disparity in our country of income, where the wealthy people continue to get wealthier, and some other people are falling out of the middle class, when we want to bring many more people into the middle class.”
Pelosi and others exaggerate economic inequality, eagerly, because they rely on pretax income, which omits the 97 percent of federal income taxes paid by the top half of income earners and the many “transfer payments,” such as food stamps, housing assistance, Medicaid and Medicare.
This exaggerated portrait of inequality undergirds the present effort by the Democrats to raise income tax rates for people with taxable incomes of $209,000 a year on joint returns and $171,000 a year on single returns.
A more meaningful measure of inequality comes from an examination of shopping. Last month the Labor Department published 2009 data on spending, based on income quintiles, or fifths, showing that economic inequality has not increased.
Differences in per-person spending from the lowest to the highest fifth are not dramatically different from 20 years ago. Measures of spending show less inequality than do measures of income.
These data are vital because the mirage of expanding income inequality is being touted by Pelosi as an excuse for tax increases.
That’s the main battle between Republicans and Democrats in the lame-duck session. Republicans want to keep current tax rates to encourage businesses to expand and hire workers. Democrats want to raise taxes for the top two brackets, and point to rising income inequality as justification.
Spending is vital because it determines our current standard of living and our confidence in the future. It shows how much purchasing power Americans have.
Further, income quintiles have different demographic characteristics, so comparisons of quintiles can be misleading. In 2009, households in the lowest fifth had an average of 1.7 people, and in half these households there were no earners. The highest fifth, however, had 3.1 persons per household, with two earners.
On a per person basis, the new Labor Department numbers show that in 2009 households in the top fifth of the income distribution spent 2.4 times the amount spent by the bottom quintile, about the same as 20 years ago. The top quintile spent 1.8 times what the middle quintile spent per person. And that ratio has not been increasing.
On a per person basis, those in the bottom group spent 2.8 percent less in real terms in 2009 than in 2008 because of the recession. In contrast, those in the top quintile spent 0.6 percent more, and those in the middle quintile spent 0.7 percent more.
But compared with 1989, the big winners are the lowest-income group, which spent 9.1 percent more per person in constant dollars. In contrast, the highest group spent 2.6 percent more, and the middle group increased its spending by 1.1 percent.
More low-income Americans own their homes free of mortgage debt than do upper-income Americans. Twenty-six percent of households in the lowest income group (including many retirees) owned their homes debt- free in 2009, compared with 18 percent in the top quintile.
All groups are spending more on entertainment, more on pets, toys and hobbies, and more on education.
Today, as we jostle with shoppers in the crowded malls, we should be thankful that inequality is not as severe, nor as intractable, as it is portrayed by proponents of tax increases.
Examiner Columnist Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.
