Tax and income inequality data are both nearly worthless

I’ve frequently pointed out that income inequality data is almost worthless.  I was “poor” from age 18 to 26, at least in an income sense.  So if every American had the same lifetime income pattern as I did, America would have about 13% poverty (assuming I end up being “poor” for 13% of my adult life.)  But I don’t think anyone except Paris Hilton would regard my student days as representing true poverty. Matt Yglesias has a new post showing that tax inequality data is also meaningless, for basically the same life-cycle reasons.  Lots of people have little taxable income when they are young, and also when they are retired.

I notice that conservatives like to talk about how 47% of Americans pay no (income) taxes, and liberals like to talk about the percentage of income earned by Americans in each income decile (with no age adjustments.)  Both are spouting nonsense.  We shouldn’t be talking about income inequality at all.  We should talk about homelessness, cyclical unemployment, single moms trying to raise kids on low wage jobs, etc.

Philosophers tell us that the most ineffective way to become “happy” is to focus directly on becoming happy.  And for similar reasons the worst way to reduce inequality is to focus on the “distribution of household income.”  Focus on the root causes of the real problems.  Change zoning laws to construct more low cost urban and suburban housing.  Increase AD when NGDP is depressed.  Provide wage subsidies to low wage single moms raising kids (financed by consumption taxes on the high consumers.)  Weaken patent and copyright protections for minor innovations.  Eliminate occupational licensing laws.

PS.  I notice that Scott Galupo at the American Conservative is also critical of the 47% figure, so I shouldn’t lump all conservatives (or liberals) together.


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43 Responses to “Tax and income inequality data are both nearly worthless”

  1. Gravatar of RPLong RPLong
    18. September 2012 at 05:43

    Prof. Sumner, are you missing the boat on purpose here?

    Obviously, the 47% number is supposed to indicate something about the sustainability of social welfare spending when almost half of a nation’s population at any point in time is not contributing any share, much less a “fair” share.

    And also obviously, this bothers Democrat-sympathizers because they have been making so much noise about standing up for “the middle class,” which obviously includes a sizeable chunk of this 47% – and which is bound to increase the value of that percentage if they have their way.

    So it’s not that looking at things this way is “useful,” it’s that looking at things this way tells us something about fiscal solvency and helps stoke the flames of class warfare. Both Rs and Ds have a vested interest in all of this, don’t they.

  2. Gravatar of Jim Jim
    18. September 2012 at 06:25

    You’re absolutely right that these specific numbers are not meaningful in an empirical sense, but that doesn’t mean we don’t have a class stratification problem, nor does it mean that we shouldn’t talk about it. Charles Murray’s latest demonstrates the emergence of separate classes, delineated by culture more than income, that is relatively new in American life.

    Unfortunately, most of the solutions you propose would exacerbate this problem. As you are well aware, subsidizing housing and single motherhood will, like all subsidies, create more of those things on the margin, especially over time. Increasing AD, presumably through monetary means, may be good for preventing cyclical imbalances but does nothing to fix the secular trend of divergence in prospects between those in the upper-classes, who are increasingly insulated from the rest of society, from those stuck in a cycle of dependency. Your latter two ideas are good ones, certainly, but I’m not sure their impact is large enough to make much difference. The dependency culture is a real one, though nowhere near 47%, and the assumptions that underlie that culture (both from the dependents and those who advocate for increasing that dependency) push us toward a fiscal reckoning that will be extremely painful.

  3. Gravatar of ssumner ssumner
    18. September 2012 at 07:17

    RPLong, But why pay attention to numbers that are so highly deceptive as to be almost meaningless?

  4. Gravatar of ssumner ssumner
    18. September 2012 at 07:25

    Jim, If there is a “dependency culture,” then stop paying people not to work.

    I’m not sure which Murray “demostrated” the claim that you say he demonstrated. The one that said the problem is bad government policies creating bad incentives, or the one that claimed the problem is genetically determined IQ, or the one that claimed it was “bad” culture?

    I don’t think single moms made “bad” decisions.

  5. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 07:37

    Your headline is way to broad…right?

    You are not saying literally that tax and income inequality data is worthless. But that this 47% figure in particular and (many others? ) are worthless…right?

    For example, the data that shows income/wealth inequity at record levels in not “worthless”…is it?

    I would even take issue with your calling any data worthless. It not data that is worthless…it is how it is manipulated by people with a political agenda that is worthless…

    Actually, to call data intentionally presented in a dishonest way worthless is putting it too mildly. It is better called dangerous.

  6. Gravatar of John Thacker John Thacker
    18. September 2012 at 07:42

    Bill Ellis:

    Actually, Scott is saying that. The record 47% figure is worthless and created by exactly the same factors that make the income/wealth inequality figures a record.

    Data that is essentially misleading and presented in a dishonest way is dangerous. The problem is that the income and wealth disparity data is equally dangerous.

    For example, suppose that everyone agrees that we all need more education, and education is good for individuals as well as the country and the world. But more education means more years as a poverty stricken student, supposedly paid for by more years as a wealthier professional. So more education means more inequality over a lifetime. Everyone with more inequality over a lifetime means more national income inequality.

    Therefore, even if all things were precisely equal, more education would lead to increasing and record income inequality. Doesn’t that cause problems with a naive use of that data, rather than using the better measures Scott mentions?

    (Even the phrase “record income/wealth inequity” is dangerous, since it presupposes that foreigners aren’t people to be counted.)

  7. Gravatar of Vivian Darkbloom Vivian Darkbloom
    18. September 2012 at 08:11

    The inequality issue and the the tax issue are related, but they are not the same.

    Whether the tax data is “meaningless” depends on whether one accepts a progressive tax rate system (with significant exemptions and deductions) as inevitable and inflexible, like a law of nature.

    The tax data is only “meaningless” if one accepts, as a sine qua non, the existing progressive tax system. If not, then the data strongly suggests that *largely because of our progressive tax system* (in contrast to, say, a flat tax system with few exemptions and deductions) roughly 47 percent of working age persons (a somewhat smaller percent if one excludes some students and others who have no “income”) are not paying any federal income tax. That is not “meaningless”. It tells quite a bit about the tax system we have and is very relevant to the issue of the type of system we want and whether that income tax system is the appropriate mechanism to address inequality.

  8. Gravatar of JL JL
    18. September 2012 at 08:26

    I agree with your premise (the young and old have little income), but I reject your conclusion.

    I, for one, would much rather pay higher taxes during my working years in exchange for extra support during my student years and retirement.

    Now I have money but no time to spend it.
    As a student I had time, but no money to do the travelling I wanted.
    And my hair is graying because I don’t know whether I’ll have enough money to retire comfortably.

    So as far as I am concerned we should keep talking about income inequality (and also wealth inequality, but that’s a different can o’ worms).

  9. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 08:26

    Scott, does John Thacker speak for you ?
    ______________________

    John Thacker,

    You assert that Scott does mean that all income and tax data is worthless. And you do so by asserting that all the data on income/ wealth inequity is based on the same same flaw in logic that Scott points out. And you offer one example to “prove” your point.

    But instead you are making my point.

    You are intentionally presenting the data in a misleading way. Your example glosses over what has caused income/wealth inequity. It ignores the data on the real causes… (taxes rates, the decline of unions, globalization, changes in the culture ) …and offers an innocuous straw man in their place.

    The problems surrounding inequity are real and should be addressed. You would sweep them under the rug…that is dangerous.

    As for your liberal baiting comment about all the poor people in the world…cry me a river…You don’t really believe that mush minded crap do you ?

  10. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 08:59

    Scott says…

    “We shouldn’t be talking about income inequality at all.”
    and…”Focus on the root causes of the real problems.”

    You are offended by semantics.

    All the problems that you speak of are causes of Income/wealth inequality.

    Persistent homelessness, cyclical unemployment, single moms trying to raise kids on low wage jobs, etc. will show up as Income/wealth inequality.

    Your solutions….
    “Change zoning laws to construct more low cost urban and suburban housing. Increase AD when NGDP is depressed. Provide wage subsidies to low wage single moms raising kids … Weaken patent and copyright protections for minor innovations. Eliminate occupational licensing laws.”
    …all of which I agree with….would have the effect of reducing Income/wealth inequity and will be opposed based on that fact.

    So why have a taboo on taking about Income/wealth inequity ? It only serves to help those trying to block the changes that you seek.

    The folks at Apple would love to have it taboo to point out that the patent protections that they enjoy are unfair and contribute to the growing Income/wealth gap.

  11. Gravatar of Andrew Andrew
    18. September 2012 at 09:00

    “The problems surrounding inequity are real and should be addressed.”

    Did you mean inequality?

  12. Gravatar of Saturos Saturos
    18. September 2012 at 09:06

    Bill Ellis, your comment shows you’ve missed the point. There’s a huge difference between wealth and income, which is precisely what Scott is pointing out.

  13. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 09:43

    inequity…”an instance of injustice or unfairness.”

    inequality…”Difference in size, degree, circumstances.”

    One is quantitative, one is qualitative…they both work for me.

  14. Gravatar of Saturos Saturos
    18. September 2012 at 09:54

    The sides on an isosceles triangle are not all equal, that doesn’t mean something devious or reprehensible is going on.

  15. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 09:55

    Saturos,

    I realize that there is a difference between wealth and income. But they are related.
    How does the difference between wealth and income have any bearing on my disagreement with Scott’s assertion that we should not be talking about Income inequality ?

    Are you saying, he is saying, we should be talking about wealth inequity ?

    Are you saying that Income inequality does not lead to wealth inequality ?

  16. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 10:03

    People are not two dimensional.

    If we were the sides of a triangle, and those sides were changeable by rules that govern all the sides, and it was more desirable to be the long side… then the long side would seek to make rules to keep them the long side…and the other sides would seek make rules that make them longer.

    As long as all sides can grow in proportion then we won’t have too many problems. But when all the growth goes to one side …we will.

  17. Gravatar of Morgan Warstler Morgan Warstler
    18. September 2012 at 10:18

    Redunkulous.

    Romney is clearly explaining to a donor the political lay of land.

    Obama’s got his 47%, they aren’t going to budge.

    Most of them are very dependent on govt.

    Where it goes screwy is that one conservative argument is that everyone should feel the weight of income taxes that go into general fund, not that come back to them as (insurance) entitlements.

    This is said any number of ways:

    The top 1% pay 37% of income taxes.

    47% don’t pay any.

    Confusing the 47% is not a big deal.

    Ultimately this is about whether we put more or less people in wagon, and to people who want less folks in wagon…

    they are all fine with Romney confusing two 47% numbers.

  18. Gravatar of Bill Y Bill Y
    18. September 2012 at 10:20

    The baseline numbers about 47%, etc., certainly do include lifecycle data, and are misleading when taken to suggest that 47% of Americans are moochers and parasites. (I think many of the people who repeat this statistic are cynically doing so despite knowing better.)

    But *changing* income inequality is meaningful. Since 1973, the US economy has generally allocated most productivity gains to the top-most portion of the income spectrum. Changing lifecycle issues don’t explain this change in apportioning of wealth–legal changes to the tax code and labor laws, and the changing economics of work (from a massive broadening of those who do work) have effected this.

    This is much more extreme a reallocation of wealth to the topmost earners than is present in other free, industrialized country, and suggests that this is under our control.

    If anything, I’d compare a static snapshot of income distribution to one of, say, age distribution. A single one doesn’t tell you very much, but a comparison of a single country over time, or between countries, is likely to be very informative.

  19. Gravatar of StPaulite StPaulite
    18. September 2012 at 10:23

    While on the subject of inequality and the state, you have to mention that Americans are the most imprisoned people on Earth. Per capita, even as an absolute number

    http://www.prisonstudies.org/info/worldbrief/wpb_stats.php?area=all&category=wb_poprate

    The only places that compare historically are very unfree societies. Aside from some wonkish activist liberals, and libertarians like Radley Balko, there is broad bipartisan political silence about this.

  20. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 10:41

    I know Economist see sticky wages (rightly) as crazy-making-big-impediment to the economy working ideally…And can see Unions as exacerbating that problem…

    But aren’t Unions transferring wealth though their activities more of a Market solution than governments transferring wealth ? Wouldn’t strong unions reduce the need for governments to transfer wealth ? …And reduce the size and power of governments ?

    Are sticky wages a bigger impediment to ideal function than huge entitlement expenses ? ( That is not a rhetorical question, I really don’t know. )
    ______________

    Libertarians…I realize you find the coercive power of both Unions and Governments to redistribute immoral…but until we reach that day when the eyes of mankind are opened and society no longer demands that the weak steal from the strong…Isn’t the way Unions steal the lessor of two evils?
    ______________

    “CONSERVATIVES – SUPPORT UNIONS!”
    http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/09/conservatives-support-unions.html

  21. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 10:44

    Most of the 47 % are elderly. The elderly vote republican by large margins.

  22. Gravatar of Saturos Saturos
    18. September 2012 at 10:49

    Bill, Scott says we should focus on consumption inequality more than income inequality, and I agree. Think of it as the economist’s refinement of the popular attempt at measuring economic inequality. But your comment about triangles was just a reductio ad absurdum of the fanatical egalitarianism with which the left is caricatured. (Hilarious.)

  23. Gravatar of Floccina Floccina
    18. September 2012 at 10:54

    I think that it could be dangerous if well over 50% of voters are net recipient of money from Government.

  24. Gravatar of ssumner ssumner
    18. September 2012 at 11:09

    StPaulite, Good point, I was going to mention that but forgot. I’ve talked about it in other posts.

    Bill, Saturos is right. The problem is that people imply that income inequality tells us something useful about economic inequality. But it doesn’t. And there are many other problems than lifecycle bias. They use realized capital gains, which isn’t income at all.

  25. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 11:17

    Saturos,

    History backs up my…”reductio ad absurdum of the fanatical egalitarianism” as you put it.

    Human nature is often absurd.

    It is never as mechanistic as your triangle metaphor implied….that was absurd.

    I am glad you got some giggles out of it anyway.

  26. Gravatar of Morgan Warstler Morgan Warstler
    18. September 2012 at 11:33

    MY GOD.

    Romney didn’t even make a mistsake.

    He’s not even talking about those who pay no taxes.

    His 47% include 22M public employees, and 100% of blacks, 66% of Hispanics, etc.

  27. Gravatar of JSeydl JSeydl
    18. September 2012 at 11:42

    Mostly agree. But you also need certain taxes (e.g., an FTT) to weaken winner-take-all markets, which are a large driver of the growing disparity in living standards.

  28. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 12:05

    Scott says…

    “The problem is that people imply that income inequality tells us something useful about economic inequality.”

    I have to disagree. Showing people how the income gap has grown to historic proportions is a useful way to illustrate economic inequality. It may be ineloquent, but it is not deceptive.. And it works.

    As some who has spent a great many years trying to address the problems of economic inequality I can tell you it is easy for the average person to get lost in the weeds of all the different facets of economic inequality. I can tell you when Occupy boiled it down to income inequality…( and I can tell you that there was a lot of debate about going to the 1% vs the 99% ,and that settling for that meme was an act of desperation. ) ….all of the sudden the varying problems surrounding economic inequality began to have weight. No one can deny that the nation’s and the media’s attention was shifted toward the game rigging aspects of our society that help create economic inequality.

    Are you saying that addressing economic inequality won’t effect income inequality ? If you can’t say that, then income inequality is an issue. Those that benefit from it will fight efforts to change it.
    Not talking about it is to ask people to consider only part of the picture.

    Talking about income inequality does not mean that you can’t talk about economic inequality…it opens the door to talk about economic inequality.

    Can you give me ONE measurement for economic inequality that does a better job of conveying the problem than income inequality ?

    If you can’t then you are stuck in the weeds.

  29. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 12:08

    Morgan…You should be a Romney speech writer. Make his his case so well.

  30. Gravatar of Bill Ellis Bill Ellis
    18. September 2012 at 13:00

    The Quote…. “There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it — that that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what. … These are people who pay no income tax. … [M]y job is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.”

  31. Gravatar of Saturos Saturos
    18. September 2012 at 19:04

    What’s this Morgan’s saying about 100% of Blacks? (You wanna say that in Chicago?)

  32. Gravatar of dtoh dtoh
    18. September 2012 at 20:16

    1. Scott knows the difference, but to the rest of you stop confusing wealth with income. There is no useful data on wealth.

    2. We should focus on consumption inequality and address it with a PCT.

    3. The income data is highly flawed. It’s based on IRS AGI, which misses a number of things including employee subsidized health insurance, unreported income (more prevalent in the lower quintiles), government handouts, accrued but unrealized capital gains.

    4. Because the AGI is based on realized capital gains many of which result from large onetime sales after a lifetime of building a business, there appears a greater income concentration in the very top percentiles. If these gains were measured and averaged over the period they were earned, the 1% numbers would go away. If for example you only had to report income once every 20 years, then every year the top 5% of the population would have 100% of the income….which would not tell you anything about real income distribution.

  33. Gravatar of W. Peden W. Peden
    19. September 2012 at 04:27

    dtoh,

    “Scott knows the difference, but to the rest of you stop confusing wealth with income.”

    YES. This is something that really frustrates me.

    I’d add to your list that income data over time doesn’t properly show you income changes for immigrants or people moving into the labour force like housewives and the disabled. Moving from Mexico to the US makes for a big change in a person’s income, but it doesn’t show up in the data.

    Not to mention that income data is unadjusted for demographic change, college enrollment, productivity changes between different income groups etcc … As Scott says, it’s nearly worthless, just like the tax data that Republicans like to cite.

    When I see graphs of median real wages (with the deflator index not specified, of course) contrasted with aggregate productivity, I know immediately that that person either doesn’t know much about economic statistics or is being dishonest. I’m inclined to think that the former is most common, though that’s little excuse since I’ve seen economits take these graphs seriously and even use the graphs themselves.

  34. Gravatar of Benny Lava Benny Lava
    19. September 2012 at 05:10

    “His 47% include 22M public employees, and 100% of blacks, 66% of Hispanics, etc.”

    100%? I never suspected Morgan was racist.

  35. Gravatar of Benny Lava Benny Lava
    19. September 2012 at 05:14

    Scott,

    I find the most salient point not discussed is youth unemployment. I bodes poorly for the long term prospects of the under 30 crowd that they have so few prospects. This is more important than income inequality metrics.

  36. Gravatar of Why income inequality data is almost worthless « Economics Info Why income inequality data is almost worthless « Economics Info
    19. September 2012 at 07:00

    [...] Source [...]

  37. Gravatar of dtoh dtoh
    19. September 2012 at 08:47

    Peden

    The other thing is that if we could change the debate and start talking about inequality of consumption rather than income, I think that would make a huge difference.

    Someone making a $1 billion doesn’t bother me a bit and it shouldn’t bother anyone else if they’re seriously interest in economic efficiency, equality and social well-being.

    IMHO, a PCC (progressive consumption tax) is something you might be able to get both conservatives and liberals to agree on.

  38. Gravatar of W. Peden W. Peden
    19. September 2012 at 09:46

    dtoh,

    Again, I’m in total agreement. I was one over to progressive consumption taxation by these papers-

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1187572

    http://www.thomaspalley.com/docs/research/Modigliani_RPIJEBO.pdf

    (Though the credit for the relative income hypothesis should go to Rose Friedman and Dorothy Brady, not Dusenberry.)

  39. Gravatar of Morgan Warstler Morgan Warstler
    19. September 2012 at 11:18

    Saturos, Obama is pulling 100% of black vote… google it, I said it the way it was said to Herman Cain.

    Again, Obama base of 47% – its a real number tossed around by pol hacks.

    it is not the 47% who don’t pay taxes.

    it is public employees, blacks, most Hispanics, and an assortment of blue state elites.

    Listen to his speech on the tape, I don’t think he’s really actually confusing the two things.

    i think he’s just throwing the last bit about folks not paying taxes out there, after giving an analysis of Obama has a base vote of 47% that will not switch.

  40. Gravatar of mnop mnop
    20. September 2012 at 03:39

    I’ve frequently pointed out that income inequality data is almost worthless.

    In order for this statement to be true, the vast increase in American income inequality would have to be a mostly generational effect. But it’s not. We have seen three decades of wage stagnation for the 99%, massive wage growth for the 1%.

    If this generational wage stratification was an increasingly important effect, we should expect measures of social mobility to be increasing in the U.S. as well. But social mobility in the U.S. is decreasing.

    Generational wage stratification is an important caveat to the 99%/1% story, but it cannot fully, or even mostly, explain the awfulness of the below graph.

    http://www.motherjones.com/kevin-drum/2012/09/why-are-rich-so-damn-angry

  41. Gravatar of ssumner ssumner
    20. September 2012 at 04:17

    mnop, The data is almost worthless for many reasons, lifecycle effects are just one of them. There’s also the problem of lumping together wage and capital income.

  42. Gravatar of Michael Michael
    24. September 2012 at 15:15

    “As you are well aware, subsidizing housing and single motherhood will, like all subsidies, create more of those things on the margin, especially over time”

    Curious if Jim is right.
    Will parents have more children if their existing ones are subsidies? -> Probably a smidge
    Will the children of Welfare parents with good subsidies have more children, than children of Welfare parents with poor subsidies? I’d lean towards no; as the good subsidies parents will spend more time parenting…

    But clearly – this isn’t proven either way.

  43. Gravatar of yonemoto yonemoto
    24. September 2012 at 22:13

    Isn’t a policy of increasing AD when the NGDP is low precisely analogous to “focusing directly on being happy” to fix when you’re not?

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