Income inequality

Distortions mar extent of gully

February 14, 2000|By Robert Rector and Rea Hederman

WASHINGTON -- The press has recently been peppered with reports bemoaning the allegedly widening income gap between rich and poor. But such reports, which are carefully designed to fuel the fires of class warfare, are invariably marred by distortions that greatly exaggerate the extent of income inequality. When these flaws are corrected, the gap turns out to be more of a gully than a canyon.

The typical income-gap report begins by dividing society into fifths, or quintiles, and then calculating the share of total income received by each. The bottom or poorest quintile is shown to receive as little as 3.6 percent of total income, while the top or richest quintile gets a whopping 49.4 percent.

Thus the top allegedly gets as much as $13 in income for every $1 received at the bottom.

But such figures are distorted by three factors:

First, they ignore taxes, which are disproportionately paid by higher-income quintiles.

Second, they fail to count many types of income, particularly government non-cash benefits such as Medicare, Medicaid, food stamps and public housing. Overall, the government transfer payments, which are not counted, are worth around $500 billion per year, or 7 percent of total income. Most of these benefits go to the lower-income quintiles.

Third, the so-called quintiles generally do not contain equal numbers of people. While each quintile will contain one-fifth the number of households, the households at bottom are small (many are single-person homes) and often have little or no earnings.

By contrast, the top quintile is composed almost exclusively of larger married-couple families, nearly all of which have two or more earners. The top quintile actually has 65 percent more people than the bottom.

This demographic imbalance greatly skews the apparent distribution of income.

Correcting these distortions has a huge impact on the income gap. The top quintile is not earning $13 for every $1 received by the bottom.

Once taxes, welfare and other government transfers are counted, that ratio falls to $8.10 to $1. Correcting the quintiles so that each contains one-fifth of the population drops the ratio to $4.20 to $1.

Moreover, the income differences that remain are, in a large part, a result of the fact that working-age adults in the top quintile work about twice as much as their counterparts in the bottom quintile. If working-age adults in both quintiles worked the same amount, the income ratio would fall to $3.20 to $1.

Finally, the income quintiles are not rigid social castes. Few people remain cemented in one quintile throughout their lives. Instead, individuals move into higher income quintiles as their earnings rise with age and when they marry.

Overall, American society is characterized by a remarkably flat distribution of income and considerable economic mobility as individuals move up the economic ladder over their lifetimes.

To everyone except professional advocates of class warfare, this should be good news.

Robert Rector is a senior research fellow and Rea Hederman is a policy analyst with The Heritage Foundation, a Washington-based public policy research institute.

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