Home Economics If Income Inequality Is Lower Then So Is Wealth Inequality

If Income Inequality Is Lower Then So Is Wealth Inequality

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As I’ve long been pointing out the American numbers on income inequality are wildly flawed. For they don’t include most of the transfers made to reduce income inequality:

We have shown on these pages that Census Bureau income data fail to count two-thirds of all government transfer payments—including Medicare, Medicaid, food stamps and some 100 other government transfer payments—as income to the recipients. Furthermore, census data fail to count taxes paid as income lost to the taxpayer. When official government data are used to correct these deficiencies—when income is defined the way people actually define it—“income inequality” is reduced dramatically.

We can now show that if you count all government transfers (minus administrative costs) as income to the recipient household, reduce household income by taxes paid, and correct for two major discontinuities in the time-series data on income inequality that were caused solely by changes in Census Bureau data-collection methods, the claim that income inequality is growing on a secular basis collapses. Not only is income inequality in America not growing, it is lower today than it was 50 years ago.

While the disparity in earned income has become more pronounced in the past 50 years, the actual inflation-adjusted income received by the bottom quintile, counting the value of all transfer payments received net of taxes paid, has risen by 300%. The top quintile has seen its after-tax income rise by only 213%. As government transfer payments to low-income households exploded, their labor-force participation collapsed and the percentage of income in the bottom quintile coming from government payments rose above 90%.

In 2017, federal, state and local governments redistributed $2.8 trillion, or 22% of the nation’s earned household income. More than two-thirds of those transfer payments went to households in the bottom two income quintiles. Remarkably the Census Bureau chooses to count only $900 billion of that $2.8 trillion as income for the recipients.

If income inequality is lower then, so, logically, is wealth inequality. For wealth is the ability to generate or collect an income. In fact, that’s how the usual calculations of wealth do it – look at the income then calculate back to what wealth is required to generate it. This is the capitalisation method used by Saez and Zucman for example.

But the error is in fact greater with the wealth distribution. For:

Our definition of wealth includes all pension wealth—
whether held in individual retirement accounts, or through pension funds and life insurance companies—with the exception of
Social Security and unfunded defined benefit pensions.4 Although
Social Security matters for saving decisions, the same is true for
all promises of future government transfers. Including Social
Security in wealth would thus call for including the present
value of future Medicare benefits, future government education
spending for one’s children, etc., net of future taxes. It is not clear
where to stop, and such computations are inherently fragile because of the lack of observable market prices for these types of
assets.

Hmm, well, OK. That’s the method used. But that means that none of that $2.8 trillion in annual rerouting of income is measured in the calculations of the wealth distribution. But clearly it should be. We also know how to value it – the capitalisation method. Say, just as an example, that we us a 5% return, meaning that this years income redistribution should be multiplied by 20 to give us the wealth distribution.

That’s $56 trillion of wealth we’ve just moved from the top income deciles to the bottom. And total US household wealth is about $130 trillion. That is, we’ve entirely changed the wealth distribution but we’re not measuring that we have.

Which is, you know, silly. Or flat out lying, your choice.

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expunct (ɪkˈspʌŋkt)
VERB (transitive)
1. to delete or erase; blot out; obliterate
2. to wipe out or destroy

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