Audio Clips

17 January 2012

The Truth About Rich vs. Poor

Veronique de Rugy recently wrote an article highlighting the problem with the Occupy argument that the wealthiest 1% are getting richer at the expense of the 99% of the rest of us.  The problem with that argument is that the 1% is a group that is constantly in flux.  It's not the same people year to year and decade to decade.  I recently listened to an interview with Niall Ferguson, a history professor at Harvard, in which he said that he was much more concerned about income mobility that income inequality.  As long as society allows for people to make advances through hard work and perseverence, income inequality is just a temporary and meaningless measure.  Here are a couple of the highlights from the article.

But even if the top 1 percent were still pulling down one-fifth of national income, this doesn’t mean that the remaining 99 percent are worse off, contrary to popular belief. Rather, as Kaplan correctly observed, “Income is not a zero-sum game. Somebody else’s income does not come at your expense. It could…but in general these numbers don’t have automatic implications for the 99 percent.” These kinds of comparisons don’t tell us anything about the absolute conditions of lower income earners.
For instance, even though the lower earners have a smaller share of income today than they did in 1990, their absolute income is higher. A smaller share of a larger national pie can still mean more income than the bigger slice of a smaller pie. This is true even after you consider growth in population.  According to IRS statistics, in 1990, the bottom 50 percent of income earners reported 15 percent of real adjusted gross income, some $517 billion in pre-tax income. In 2007, they reported only 12 percent of AGI, but this percentage amounted to more absolute dollars—some $1.1 trillion in pre-tax income.

But even these figures miss a more fundamental point. The top 1 percent in 1990 are not necessarily the same people as the top 1 percent in 2012. Data describing comparative income performance generally do not take into account the movement of individual households through time. There is no accurate assessment of the income gap without accounting for income mobility. The more the mobility, the less the significance of widening income disparities.

So what does that mobility look like? Take the top earners in America. Using IRS data, the Tax Foundation has shown that of the 675,000 taxpayers who reported $1 million in pre-tax income at some point between 1999 and 2007, only about half remained millionaires just one year later (see figure). A tiny 6 percent, or 38,000 people, retained their millionaire status for all nine years. In other words, most top earners are likely to lose their membership in the millionaires club.

And things look rosier at the bottom of income distribution, too. The same Tax Foundation analysis showed that about 60 percent of households that were in the lowest income quintile in 1999 had moved to a higher quintile by 2007. And about one-third of those in the lowest quintile moved to the middle quintile or higher. While it may be difficult to rise literally from rags to riches, there is still plenty of opportunity for Americans to climb up the income ladder.


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