Pethokoukis, Economics, U.S. Economy

The rise in US income inequality hasn’t been because of the tax code

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How is income mobility in America? Not so good, according to a Brookings study of IRS income tax data for 34,000 households from 1987 through 2009. In “Rising Inequality: Transitory or Permanent? New Evidence from a Panel of U.S. Tax Returns,” researchers found the increase in US income inequality to be almost entirely permanent in nature and not due to yearly fluctuations (one year you get a bonus, another year you don’t). You sort of stay stuck where you are. So the rich get richer and stay that way, while the poor get relatively poorer and stay that way. In fact, had the transitory inequality component been the dominant factor, it would have reflected increasing income mobility. A summary:

Using a large panel of income data … the authors show that for men’s labor earnings, the increase in inequality was entirely permanent (100 percent), while for total household income, roughly three-quarters of the increase in inequality was permanent. They estimate that the permanent variance for men’s earnings roughly doubled in the 20 years between 1987 and 2009, while the permanent variance of total household income increased by about 50 percent over the same period.

1. Don’t blame supply-side economics. The study shows that the progressive tax system “partially mitigated” the increase in income inequality.

2. Maybe blame information technology. Since rising inequality mostly reflects an increase in permanent inequality, “then consistent explanations would include skill-biased technical change and long-lasting changes in firms’ compensation policies.”

3. It’s too bad that in the paper’s literature review, there was nothing about the inequality research from Cornell’s Richard Burkhauser. Hopefully he will comment.

20 thoughts on “The rise in US income inequality hasn’t been because of the tax code

  1. How is income mobility in America? Not so good, according to a Brookings study of IRS income tax data for 34,000 households from 1987 through 2009. In “Rising Inequality: Transitory or Permanent? New Evidence from a Panel of U.S. Tax Returns,” researchers found the increase in US income inequality to be almost entirely permanent in nature and not due to yearly fluctuations (one year you get a bonus, another year you don’t). You sort of stay stuck where you are. So the rich get richer and stay that way, while the poor get relatively poorer and stay that way.

    Its the money Jimmy. The rich have access to cheaper funding earlier than the poor. As such they stay ahead of the worst of the inflationary consequences and can survive the downturns as long as the banks are there to bail them out by access to even more borrowing at low rates. The poor get screwed by the Fed’s counterfeiting and the loss of purchasing power.

  2. Yeah right! The thirty year supply side experiment we’ve had in the US has nothing to do with income inequality,and I just saw a pig fly by my living room window.

  3. It’s crazy anyone can talk about income inequality without factoring in the obvious: illegal immigration.

    “That’s right: The three states with the highest income inequality also all share a border with Mexico. But what about New York? Or Georgia? Or Illinois (which is the sixth-most-unequal state)? They are all hundreds of miles away from Mexico.

    Well, it turns out that all of those states have huge illegal immigrant populations too. According to the Pew Hispanic Center, every one of the top five unequal states also is among the top 10 states with high illegal immigrant populations.”

    http://washingtonexaminer.com/conn-carroll-the-income-inequality-factor-liberals-cant-talk-about/article/2515360

    • So how many illegal aliens file tax returns, do you suppose? And if the answer is hardly any, how would aliens influence a study based on tax returns, as in the one cited above? Less dogma and more critical thinking please.

      • “So how many illegal aliens file tax returns, do you suppose?”

        Millions file using ITIN’s(Individual Taxpayer Identification Number.) In fact, the IRS pays out somewhere between $4-$5 billion each yr in child tax credits to illegal immigrants.
        Besides, illegal immigration has been going on for generations. Reagan signed an amnesty for illegals back in ’86. And the anchor baby loophole has created millions of new American citizens with a high chance of staying in poverty. For example, nearly a quarter of all Hispanics are poor in California.

        ” Less dogma and more critical thinking please.”

        Indeed.

        • Well no. Employers are obliged to ask for SS numbers so there is a thriving business in fake cards and off-the-books payments. But no self respecting illegal alien will file a return under a bogus SS number even if he could claim refunds and credits. (Withholding still applies.) The SSA “estimates that for 2005, the last year for which figures are available, about $9 billion in taxes was paid on about $75 billion in wages from people who filed W2 forms with incorrect or mismatched data, which would include illegal immigrants who drew paychecks under fake names and Social Security numbers.” http://usatoday30.usatoday.com/money/perfi/taxes/2008-04-10-immigrantstaxes_N.htm

          Yes a few file returns under ITINs at little risk to themselves.
          And yes, the ’86 amnesty brought illegals into the fold, But then they aren’t illegal, are they? A much better explanation for income inequality in NY and CA is the difference in wage scales between NYC and Ticonderoga, and between SF and Modesto. A valid knock on inequality studies is that top decile wages in NYC probably buys you less than fifth decile wages does upstate. (i.e., some part of the shift is explained by urbanization.)

          • there are quite a few credits, deductions, exemptions that are not available to folks who don not have valid SS numbers.

            and employers who hire illegals don’t need that much of a “fake” credential to look the other way.

            If we were really serious about the issue, we’d do what Canada does with it’s guest worker program in that employers of illegals suffer very serious financial consequences – so serious that there is no problem.

            We have the problem because we want to demonize the “illegals” while giving the employers of them a virtual free pass.

          • “Yes a few file returns under ITINs at little risk to themselves.”

            A few = around 3 million people.

            “And yes, the ’86 amnesty brought illegals into the fold, But then they aren’t illegal, are they? ”

            So what? Illegal immigration is how they got here. Doesn’t change my point one bit that illegal immigration is a big factor regarding inequality. The Hispanic poverty rate is in large part due to the fact that around 60% of illegal immigrants arrive here without even a HS degree. Amnesty or not, they are going to most likely be consigned to a life in the underclass.

            Further, illegal immigration tips the wage scales downward on the bottom rungs. It’s harder to climb out of the hole when there are plenty of people behind you ready to do your job for less.

          • “We have the problem because we want to demonize the “illegals” while giving the employers of them a virtual free pass.”

            Oh, shut up, Larry with your stupid quotes around illegals.
            It’s not demonization to say you’re not interested in importing Mexico’s poverty. Taxpayers already have to foot the bill for enough tax consumers.

          • “If we were really serious about the issue, we’d do what Canada does with it’s guest worker program in that employers of illegals suffer very serious financial consequences – so serious that there is no problem.”

            I’d say it has much more to do with the USA being on Canada’s southern border instead of Mexico.

            But I don’t really have a problem with Canada’s guest worker program: http://www.npr.org/2013/01/31/170775228/the-mexico-canada-guest-worker-program-a-model-for-the-u-s

      • The answer is 0.

        How many illegal aliens pay for their kiddies healthcare?

        Same answer: 0.

        I have audited the books at the largest childrens hospital in the southwest.

  4. Check out my blog “Real Reasons for Income Inequality” http://gulfcoastcommentary.blogspot.com/2012/11/real-reasons-for-income-inequality.html
    Here’s a few reasons:
    1) Quantitative easing puts trillions in the hands of the top 1%
    2) Our silly idea that we must maintain a bit of inflation kills the lower class with inflation. 2% inflation means that prices double in 36 years. The wealthy (top 10%) can hedge and own stocks. The poor cannot.
    3) The Fed’s repeated bubbles put big gains in the hands of the well-off enriching the top 1% and top 10%
    4) Gov’t tax policies encouraged the housing bubbles enriched those that can get big mortgages.
    5) ZIRP is killing the saver class, retirees, pension funds. These are NOT the top 10%!

    If you got rid of the Federal Reserve and constant excess reserve priming, the natural state of affairs would be slight deflation–which is good! You want prices to come down!! Don’t you want the next generation to afford housing (and not through some kind of real estate bust)??

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