Pethokoukis, Politics and Public Opinion

New study undercuts Obama’s income inequality argument

9.18.12 Obama Forward!

Washington’s tax hike on wealthier Americans won’t accelerate economic growth, won’t create jobs, and won’t lower the debt by more than a rounding error. So what was the point of all that debate about the fiscal cliff? Why did President Obama insist on those upper-income tax increases, especially when the economy continues to struggle?

Simple: It was a way — even if mostly symbolic — of addressing what President Obama views as America’s biggest problem: Rising income inequality. The purest expression of the president’s economic views came during a 2011 speech in Osawatomie, Kansas, where he spoke at length about how rising inequality “hurts us all” and “gives lie to the promise that’s at the very heart of America: That this is a place where you can make it if you try.”

But does the data back up Obama’s rhetoric? Most claims that it does are based on two inequality studies, one by economists Thomas Piketty and Emmanuel Saez, the other by the Congressional Budget Office. Both studies are frequently cited in mainstream media stories about income inequality. But new research by Philip Armour and Richard Burkhauser of Cornell University and Jeff Larrimore of the Joint Committee on Taxation raises questions about those two studies and their conclusions. Here are their two key findings:

1. All income levels saw expanding incomes from 1979-2007. There’s been no income stagnation for the middle class.

2. While inequality has risen, it was mostly if not almost entirely a 1980s phenomenon.

Let’s briefly walk through the numbers with the help of a few tables:

1. Piketty and Saez’s data shows that from 1979-2007, the mean pre-tax, pre-transfer cash market income of the bottom 20% of tax units fell 33%, the middle quintile rose just 2.2%, while the top quintile rose 32.7%. The top 5% did even better, with their market income rising 37.9%. The poor got poorer, the middle stagnated, the rich got richer. You’ve heard this story.

2. But Burkhauser and Larrimore, in a study last year along with Indiana University’s Kosali Simon, take issue with how Piketty and Saez measure income and make a number of common-sense changes. The Burkhauser-Larrimore-Simon data reflects a) the rise in cohabiting couples and adult children living with parents who can share resources, b) cash-transfers from government, c) the impact of the tax code, d) employer and government-provided health benefits. The result is a measure that better captures the actual consumption potential of US households.

Under this formula, the income of the bottom quintile from 1979-2007 rose 31.8%, middle quintile 34.4%, and top quintile 54.0.%. While inequality did increase over the span of the period — income for the top 5% rose 68% — everyone was better off.

3. But then the CBO took a crack at the inequality debate, adding a new twist. They added income from realized capital gains. And that makes a big difference. When you factor that additional income into the Burkhauser-Larrimore adjustment to Piketty-Saez, you get the following results: Income rose 31.1% for the bottom quintile from 1979-2007, 36.7% for the middle quintile, and 83.1% for the top quintile. For the top 5%, income rose a whopping 136.7% over those three decades. Everyone did better, but clearly upper-income folks did much, much better.

One other point: As the chart below shows, no matter how you slice the numbers, you find that “the majority of that inequality growth occurred in the 1980s—with somewhat less in the 1990s and very little in the 2000s.”

4. But in their new study, Armour-Burkhauser-Larrimore question the CBO’s choice of using realized capital gains income:

Since individuals can choose when to realize them for tax purposes through the timing of transactions … income recorded as taxable realized capital gains this year may not be due to increases in net-wealth this year. Additionally, taxable realized capital gains exclude accrued gains this year from assets that are not recorded on this year’s tax returns, either because the asset was not sold, was sold but held in a tax-sheltered account, or was carved out of the tax code (e.g. primary housing).

To capture changes in net worth, it’s better, the researchers argue, to include capital gains as measured by the increase or decrease in the value of capital assets — including those in tax sheltered accounts — in each year regardless of whether that asset was sold for a taxable realized gain.

Now for data collection reasons, only the years 1989-2007 are included, but that’s enough to show that inequality was falling, not rising, over those two decades and business cycles. Mean income rose 32.2% for the bottom quintile, 20.2% for the middle quintile, and 9.3% for the top 5%.

Armour-Burkhauser-Larrimore sum up:

For those focused on taxable income of tax units excluding taxable capital gains—a Piketty and Saez (2003) measure of market income, based on tax returns—undoubtedly income inequality has grown substantially in recent years, and the middle-class is struggling.

The inclusion of taxable realized capital gains in income measures that are more inclusive—like the CBO (2012) measure using both tax returns and CPS data—will reinforce this view of rising inequality, but it does so by including a measure of capital gains that by definition misstates the timing of gains and misses the increasingly important capital gains in tax-sheltered accounts.

In contrast, when using our comprehensive income definition that mirrors the CBO (2012) report but excludes all capital gains, we observe that incomes have risen throughout the distribution and since 1989 have largely risen uniformly throughout the distribution.

Alternatively, when we include capital gains in our series but do so on a yearly accrued basis that is more in line with Haig-Simons principals, it increases the volatility of income trends but demonstrates slower growth throughout the income distribution than when capital gains are excluded. This reflects lower capital gains accrual rates in the most recent business cycle than in the proceeding ones. But it also illustrates that inequality growth has not risen in recent years, as the top quintile of the income distribution had the slowest income growth from 1989 through 2007 while the bottom quintile had the fastest.

Doing so provides evidence that contradicts the notion that income inequality fueled by capital gains at the top end of the distribution has dramatically increased over the past two business cycles.

To be clear, we shouldn’t ignore the market income numbers from Piketty-Saez which likely reflect, among other things, an inability of the US education system to deal with the demands that rising automation and globalization have made on workers. But the research of  Armour, Burkhauser, and Larrimore suggests that making an inefficient, lop-sided tax code even more distorted — which Washington just did — is nothing more than an ideological indulgence based on a misinterpretation of economic data.

41 thoughts on “New study undercuts Obama’s income inequality argument

  1. What about the impact of the tax code change in the 1980s that encouraged a shift in small business structure from corporations (‘C corp’) to partnerships, LLCs, etc.? After that shift income that would previously have been reported as corporate income showed up as individual income. Would that not have explained a significant portion of the “almost entirely an 80s phenomenon”?

    • When the president or the left surprise us by doing or using honest, fully contexted, non-agenda-driven, true studies, then you’ll find one that doesn’t undermine the president–from a lefty doing the usual agitprop, highly selective, context-ignoring, agenda-driven, faked studies.

      • “When the president or the left surprise us by doing or using honest, fully contexted, non-agenda-driven, true studies, then you’ll find one that doesn’t undermine the president–from a lefty doing the usual agitprop, highly selective, context-ignoring, agenda-driven, faked studies.”

        Bullsh*t. This President is so centrist he makes my eyes bleed. If it weren’t for the loonies taking over what USED to be “Conservatism,” no objective person would think like that.

        On tax policy alone, Obama is to the right of Eisenhower.

        • You mean the same old canard about tax rates under Eisenhower being higher than under Obama?

          Two things undermine your assertion:

          (1) Thanks to the plethora of tax deductions back in those days before tax “simplification” took hold, no one with any sense was paying the top marginal rates under Ike.

          (2) Eisenhower, much more so than Obama, limited his spending to items that were within the proper purview of Federal government intervention … as opposed to promoting green energy, “fighting” climate change, propping up the quagmire known as the “War on Poverty”, and “stimulus”.

          The Progressive paradigm you apparently embrace, has a FUNDAMENTAL flaw you fail to recognize … it subordinates the intelligence and initiative of 300 million to the control of an elite few, as though they are omniscient.

          Personal initiative is the golden goose of American prosperity … and Progressive efforts to have ordinary citizens “outsource” their initiative and responsibility to a few alleged Best and Brightest when it comes to finding the answers to their problems are not only choking off that goose, but also aggravating income inequality by discouraging those millions from making the necessary efforts to create and acquire more wealth.

          Progressives OWN income inequality.

          • “(1) Thanks to the plethora of tax deductions back in those days before tax “simplification” took hold, no one with any sense was paying the top marginal rates under Ike.”

            Again, you only undermine your own arguments when you bring this up. My point, ALL ALONG, is that just cherry picking data to “prove” a point while ignoring 99% of the rest of the situation is a meaningless exercise. You can’t assign low marginal rates to prosperity, and then turn around and say that high ones don’t matter because…..

            You can’t have it both ways.

            The hypocrisy comes in when YOU do it to “prove” a point, and then start calling everyone else a “collectivist” which is a perfectly asinine response.

            “Personal initiative is the golden goose of American prosperity … and Progressive efforts to have ordinary citizens “outsource” their initiative and responsibility to a few alleged Best and Brightest when it comes to finding the answers to their problems are not only choking off that goose, but also aggravating income inequality by discouraging those millions from making the necessary efforts to create and acquire more wealth.”

            U-S-A! U-S-A! U-S-A!

        • And you can’t ignore the rest of the story that doesn’t fit your narrative, Max. I just pointed out two facts that wash out the picture you are trying to paint, that Obama is a “centrist”.

          Then you dismiss my assertion regarding personal initiative with mockery. How about dealing with the facts, instead … you can start with the history of innovation in this nation, the bulk of which was/is the result of individuals thinking outside boxes big and small to do things better, and ACTING on those thoughts without being prompted, permitted, and/or paid by a government with delusions of omniscience.

          • “Max. I just pointed out two facts that wash out the picture you are trying to paint, that Obama is a “centrist”.

            Then you dismiss my assertion regarding personal initiative with mockery”

            Sir, your assertion that Obama is not a centrist, and my mockery of your paean to “personal initiative” (as if this was uniquely American and otherwise unknown in human history) do not constitute what impartial people call a “fact.”

          • “Guess you do not know what centrist means, or maybe you are confusing with the retoric with his actual actions”

            No sir, I DO know what a “cenrist” is, and in case you haven’t been told before, since most here live in their own bubble, what passes for a “Conservative” or a “Republican” has gone so far off the rails, people have forgotten the very meaning of the words.

            Remember: Reagan himself would be voted out of office by a Tea Bagger today. There is no room for a Bob Dole, a Gerald Ford, or even a Betty Ford, in today’s Republican climate.

            If this President was a REAL Leftist, some of these banksters and hedgies would be doing hard time. As it is, he’s stuck with the revoloving Wall Street door, and his appointment of Jack Lew, as well as Summers and Geithner prove it.

            People try to paint him as an apologist, but he butchers terrorists with drones like a gangster. If his defense of Social Security and Medicare makes him a Leftist in your view, then you live in a nation of leftists, because no one really wants them touched.

            Words matter. Words count. And that’s why David Frum, Bruce Bartlett, and so many others have abandoned the faux “Conservative” movement and the GOP. THOSE people are the “pragmatists.”

        • Yep, bob and weave … and refuse to engage on the substance of the matter, Max. You are what you decry.

          Try opening your mind to the idea that the truth is not always found by taking the average of everyone’s pop-culture opinion.

          • I’m doing nothing of the kind. You’re just incapable of acknowledging your own prejudices. You’re drowning in them.

    • Max, the President is following the same disproven economic policies that have never worked. Coming up with these studies is EASY because if that pesky little thing we call “empirical evidence”.

      You’ve been getting hammered here lately because you’re not a pragmatist. Unwilling to learn and recalcitrant, you keep making the same (lame) argument which can be summed up in a single word: Zealot.

      • “Max, the President is following the same disproven economic policies that have never worked. Coming up with these studies is EASY because if that pesky little thing we call “empirical evidence”.

        You’ve been getting hammered here lately because you’re not a pragmatist. Unwilling to learn and recalcitrant, you keep making the same (lame) argument which can be summed up in a single word: Zealot.”

        You know, you’re response is a study in the pathologies of current American political discourse.

        You refer to “empirical evidence.” Where the f*ck is it? All I see is the repetition of slogans I’ve seen a million times before, utterly disconnected from our own experience.

        “Disproven economic policies?” When things hit the fan in September of 2008, that is about all of the “disproof” one could possibly ask for. Yet, despite the fact that the tax and monetary policies you beg for were imposed, we wound up in the crapper, and we’re not crawling out of this for years to come. Tell me: what was “disproven?” If ANYTHING, it is what you advocate.

        You think I’m getting “hammered” in these threads, but that is only because you see what you want to see. It happens all the time. Whether it’s on housing policy, the effect of tax policies, I present the evidence from the most impartial sources I can find, while everyone else is giving me IBD editorials as “proof.”

        I laugh at this crap, especially since I’m not beneath contacting people at Barron’s and the Washington Examiner DIRECTLY and calling them out. These “journalists” don’t know WTF they’re talking about, and it is now an open secret that AEI, CATO and Heritage are nothing more than captives of the interests who promote these “ideas” because it benefits them at the expense of everyone else.

        The crazy thing is those who get slammed the most by this are the ones who buy into it.

        It’s ridiculous. Common, but ridiculous.

    • Dr. Planck, we are awash in stories highlighting the quantum of truth in the President’s arguments. For example, go ahead and Google “Mitt Romney is rich” and you’ll get thousands of hits. Yesterday we were treated to day-long head nodding from the press about what a good idea it might be to issue a trillion dollar coin. The energy in these stories is so vastly out of proportion to the tiny packet of truth they contain.

      So, it’s true, this is not Science or Annals of Internal Medicine. It is a partisan journal. But having found a forum that does not write hagiography of Democrat Presidents, you choose to gripe about the messenger.

      I wonder if you echo your comments on Slate and Huffpo, whose pages bulge with the types of articles you want to see, while being bereft of any of the thoughtful criticism you see here.

      • “So, it’s true, this is not Science or Annals of Internal Medicine. It is a partisan journal. But having found a forum that does not write hagiography of Democrat Presidents, you choose to gripe about the messenger. ”

        Then let them stop pretending they are doing genuine research. I mean, what is the point? Ostensibly, all of us would like a diet of the truth, and some impartiality, to guide our own decisions and help the process of informed opinion, which the Founders stressed, many times, was the basis of a functioning democracy.

        If you’re coming here because they’re cheerleaders, and they write these screeds merely to steer you wrong, reinforce ignorance or willfully ignore unpleasant realities, why even bother?

        Pursue the truth, no matter where it takes you. It’s good for you, and good for your country. I mean that.

        • “Let them do genuine research …”

          Oh, research from Cornell University isn’t “genuine?” Who knew, Max, besides you?

          You do deserve some credit, however, for hijacking the thread with blather, sans evidence.

          • “Oh, research from Cornell University isn’t “genuine?” Who knew, Max, besides you?”

            You raise a more important point than you know. Here is the head of Columbia University’s Economics Department. Let me know how impartial you think this guy is:

  2. No data series that ends in 2007 will tell us squat about the state of the middle class in 2013. No less than $7 trillion in home equity went up in smoke in the intervening 5 years. Wages took a hit in the recession also, and then they got worse. Slip Burkhauser another couple hundred thou and tell him to get back to work.

  3. A better argument is that wealth for the poor is caused by the rich. I don’t know why it’s never made.

    The rich spend a low percentage on themselves. The excess (“at some point you have enough money,” as Obama said to Joe the plumber. Yes) is invested. It buys heavy equipment for the ditch digger, raising the earnings of the ditch digger enormously.

    Extra money in the hands of the rich gets invested. Extra money in the hands of the poor gets consumed.

    Extra money is the seed corn of the economy. It’s disastrous to redistribute the seed corn as food today.

    A tax on the rich doesn’t reduce their standard of living even a tiny bit. It reduces their investment, and reduces the earnings of the ditch diggers.

    Trickle-down isn’t dimes falling from the pockets of the rich, but investment that raises the productivity of the poor.

    A tax on the rich reduces the earnings of the poor, and has no other effect.

    • “Extra money in the hands of the rich gets invested. Extra money in the hands of the poor gets consumed.”

      That is KEY. And, since the domestic base of consumable goods is not expanding, that increased consumption goes into a rising trade imbalance and increasing indebtedness, which hurts the poor in the long run.

      The only way to truly improve the lot of the poor in this country in real terms is to expand the available domestic pool of goods and services which they can consume. Who is going to do that when you take investment income from the rich? The Government? Its record in that regard is abysmal.

  4. One thing that is almost always left out of these analyses is the assumption that the quintiles remained the same through the period studied. I was in the bottom quintile in 1979. From the first chart, I should have realized a 31.8% gain by 2007, but that isn’t the case. In those 20 someodd years, I have managed to move to the middle quintile which had a 34.4% growth. Can’t make that argument either because that 34.4% would have been if I had *started* in that quintile, in reality I had much much greater growth.

    Thomas Sowell had an article that showed movement between the quintiles is quite active over a few short years and the majority of the top 20% today will fall lower 10 years from now, and the majority of the bottom 20% will move up. Unfortunately, I am unable to find a link to this, but a better analysis would include that movement across quintiles as well.

  5. The question to explore here is this:

    Over the last 30 years, is it better to have middle class in the US or in France, Germany, etc?

    To compare the rich to the middle class in terms of gains is kind of like comparing an Olympic athlete to a normal person. Of course the top 1% are going to mop up more gains. That is why they are in the 1%.

    But what if you compare the US middle class to the middle class in France? Who has posted the most gains in the last 30 years?

    I suspect the US middle class wins that one handily.

  6. What every president should advocate is a program that makes every US citizen better off. Has anything Obama has advocated made anyone better off? (Maybe gov’t employees). His focus is constantly on dividing, pitting everyone against each other and shifting blame. I never get the sense that he cares at all about solving problems or actually helping people. He went full bore into getting a tax increase on the wealthy even though it solves absolutely nothing and is probably counterproductive. Yet where were his energies regarding unemployment (the only reason why the unemployment rate is not over 10 percent is because people stopped looking)? Where is the slightest focus regarding our astronomical debt? What Obama shows is the dangers of electing a doctrinaire. He chases his ideological white whale without the slightest conscience or compassion and has improved the lives of no one. Obama really is one of the most cold-hearted presidents we ever had. Oh but he passed health care. Let’s see how that trainwreck works out. Actually we have already seen the results in similar experiments around the world. The results are dismal. But there again, he got his doctrinaire achievement at the price of making things worse. Because in this mindset, ideological fealty is more important than it’s real life effects.

    • “What every president should advocate is a program that makes every US citizen better off. Has anything Obama has advocated made anyone better off? (Maybe gov’t employees).”

      Right. Here we have another informed specimen. Public sector employment is down by over 500,000, but of course, “gubbamint employees” are really being helped out.

      The rest of your post is incoherent rubbish.

      • @Max Planck-So you are saying that Obama’s presidency hasn’t really helped anyone. Great rejoinder. Lol. And way to focus on a throwaway observation. (I guess “maybe” is above your reading level). So do you have anything to offer beyond lame insults? I breathlessly await your convincing demonstration of the extraordinary success of Obama’s economic initiatives. To stoop to your level, you truly are an idiot. Sticks and stones.

        • “@Max Planck-So you are saying that Obama’s presidency hasn’t really helped anyone.”

          No, I did not say that at all, and you must have some cognitive reading deficiency to come to that conclusion, or more plausibly, your mind is so controlled to a pre-fabricated reaction, you saw something that didn’t exist.

          What I DID say was that given the circumstances, I doubt if anyone else could have done better. That’s not the same thing.

          You had your opportunity to impose your version of economic Sha’ria on the nation: you succeeded- low taxes, an impotent regulatory regime, perpetual war, and for business, mob rule without a care for the consequences.

          The solution to our dilemma wasn’t still lower taxes, less regulation, more wars, and an even freer hand for the banks.

      • Incidentally, the number of federal government employees has increased during Obama’s presidency. You only get a decrease if you add local and state public sector employees, which can be any number of factors, including changes in political leadership (the Republicans did very well at the state level in 2010), economic hardship, etc. That the number of public sector employees at all the governmental levels combined has decreased is certainly not a matter of policy, unless driving a state to insolvency to the point that it has to lay off public sector employees can be called a policy.

        • Oh, please:

          “Incidentally, the number of federal government employees has increased during Obama’s presidency. You only get a decrease if you add local and state public sector employees, which can be any number of factors, including changes in political leadership (the Republicans did very well at the state level in 2010), economic hardship, etc. That the number of public sector employees at all the governmental levels combined has decreased is certainly not a matter of policy, unless driving a state to insolvency to the point that it has to lay off public sector employees can be called a policy.”

          It was precisely the driving us to insolvency that caused all those layoffs, but that was not done by Obama, but by his predecessor. A lot of the Federal money went to the States for the purpose of keeping schools and police departments functioning.

          Here’s the AEI’s own take on it.

          http://www.aei-ideas.org/2012/09/has-government-employment-really-increased-under-obama/

          The charts show that employment levels for the Federal government have been fairly stable for some time (sans census)

          Lastly, from CNN:

          Employees: The number of federal employees grew by 123,000, or 6.2%, under President Obama, according to the White House’s Office of Management and Budget.

          Much of the hiring increases came in the departments of homeland security, justice, veterans and defense.

          The federal payroll has been expanding since President Bush took office, after declining during the Clinton administration. But it’s still a tad smaller than it was in 1992, said Craig Jennings, a federal budget expert at the progressive think tank OMB Watch.

          The federal government has been one of the few areas that’s grown during the economic downturn. The private sector remains down 1.1 million jobs from the start of 2009, while state and local governments have shed 635,000 positions.

      • What did you not like about Winston’s post Max? That he credited the economic illiteracy of this presidency to ideology? But so did Bush. The economic fallacies of every administration are the same. Neo-Keynesianism is still the policy de jour. What is not mentioned is how inflation causes the great disparity between the rich and the poor as far too many supply siders are monetarists. So each side whistles past the grave yard and won’t look at the cemetery full of their victims.

        The entire argument of the disparity between the rich and the poor is infantile and designed to keep you from questioning what is really causing it and what the real solution to it is. As the reigning ideology is that government MUST do something about it, it always favors Big Gov. control. Redistributing income, monetary and fiscal policy don’t work and has led to all the booms and busts we have had. Letting the productivity of the economy naturally bring down all prices would accomplish everything we desire socially, the only problem with that is that it rewires no central planning or Gov. Interventions.

  7. So there you go. All our problems are supposedly the fault of those evil Republicans. At some point hopefully Obama can take responsibility for his own presidency. Maybe in his 7th year.

  8. You don’t need any study for this. Look around. Factory jobs, if you can even get one, are starting people out at 11-12 dollars an hour. Who can raise a familyi on that? Meanwhile, corp. executives are routinely being given an 8 figure bonus. Then you have companies like Walmart that employ 80-90 percent part time employees in their retail stores so they dont have to pay benefits. Meanwhile 3 of the richest people in the US are Waltons. When is enough enough.

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