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Measuring Income Inequality: It Doesn’t Add Up

During the State of the Union this year, we heard President Obama talk repeatedly about fairness and taxes as he painted a picture of income inequality to shape the narrative of the coming election year.  The problem is that income inequality really is a myth, yet it is being perpetuated: the gap between rich and poor has never been higher.

The data used most frequently to substantiate this claim is a Congressional Budget Office (CBO) report from October 2011. However, the glaring problem with this report is that it only covers the period from 1979 to 2007 — ending right before the Great Recession. Convenient?

So in November, Ron Schmidt of the University of Rochester School of Business Administration, did an analysis of the CBO data and compared it to IRS data during the same time period — but through the year 2009, the latest year for which IRS data was available. He found something very, very different. In a reported summary,

According to IRS data, which extend through 2009, the average nominal Adjusted Gross Income (AGI) for filers with AGI of at least $500,000 declined by 17.8 percent from 2007 to 2009, and their average after-tax income declined by 19.9 percent. For those with AGI of less than $500,000, AGI declined by only 2.6 percent, and after-tax income declined by only 1.5 percent. These numbers certainly do not indicate an increase in income inequality.

In fact, there has been a marked decline in income inequality over the last decade. From 2000 to 2009, average AGI declined by 15.0 percent and average after-tax income declined by 11.0 percent for returns with AGI of at least $500,000. (Filers with an AGI of at least $500,000 represent 0.5 percent of all returns in both years, so this comparison is similar in spirit to the CBO report, which looks at the top 1 percent of households.) For all other returns, there were increases of 14.6 percent for average AGI and 17.3 percent for average after-tax income.

It revealed that income inequality is not only not at an all-time high, but also, due to the nature of economic and business cycles, it is relatively the same as it was twenty-five years ago.

The repeated calls for fairness last night reminds one of Margaret Thatcher’s famous speech in front of the House of Commons where she lambasted her opposition for suggesting that the gap between rich and poor had widened. The Prime Minister People responded that “people on all levels of income are better off than they were in 1979. The honorable gentleman is saying that he would rather that the poor were poorer, provided that the rich were less rich. That way one will never create the wealth for better social services, as we have. What a policy. Yes, he would rather have the poor poorer, provided that the rich were less rich. That is the Liberal policy”.

Liberal policy indeed is alive and well in America today. Thankfully, income inequality is not.

Though Obama may be pretending to draw a line in the sand between himself and the Republicans, he is really drawing a line for voters: Them vs The Rich Guy (millionaires and billionaires, anyone?) Setting up the narrative in the State of the Union for the year has allowed Obama to pander to the electorate during this campaign season and relentlessly go after those who have proven to be successful as a source of increased tax revenue to cover his spending problem.

This is his solution for inequality. Fair?

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