Income gap not wide between rich, poor

A Congressional Budget Office study has claimed that between 1979 and 2007 after-tax income for richest households grew substantially more than it did for others.

Let’s look at what is not happening. The poor are not getting poorer because the rich are getting richer. Gary Burtless of the Brookings Institution says living standards have improved for the poor and middle-class since 1980, in comments he provided for an American Enterprise Institute study, Oct. 25. He notes real income and consumption for middle and bottom income levels improved. Indeed, the poor and the middling are getting richer, not poorer.

The unusual cases in which middle-income living standards stopped rising involve “a fairly brief period — say, the last five or 10 years, when living standards have been affected by a steep recession and anemic recovery,” Burtless writes. Alternatively, declining living standards over two or three decades, involve a trend “within fairly narrow slices of the population — unmarried men in their 20s and early 30s who have below-average schooling…or groups that have been particularly hard hit in the recent slump.”

Next, many of those at the bottom don’t stay there. They move up. Many people at the bottom today are not the same people who used to be there.

A large segment of the richest also no longer are the richest.

This upward — and downward — mobility refutes the claim tax-rate reductions and deregulation in recent decades helped only America’s richest. There’s no reason to assume this mobility is changing. The Tax Foundation also points out it is “wrong to claim that federal taxes have become less redistributive over” the period of the CBO study. That’s because the CBO study relies on the average effective tax rate going down, which “has nothing to do with the distribution of taxes paid…”

The rich are paying more than they used to. The Tax Foundation finds “a very strong trend…throughout the last three decades” of the top 1 percent of earners paying an increasing share of income taxes. In 2009, the top 1 percent’s share of income taxes was 36.7 percent, higher than any year prior to 2000, and double what it was in 1980. That is partly because a record 42 percent of tax-filers paid no tax or received money back, thanks to ever-growing refundable tax credits. The Tax Foundation says income is now more evenly distributed than it was under most of Clinton’s second term.

The Tax Foundation finds “no clear trend” since the 1990s of income distribution becoming more unequal. But there clearly is evidence “federal taxes have become more, not less, redistributive over the last three decades.”

The CBO study plays into the hands of advocates for redistributing wealth. But on what moral basis does one person demand what another has, simply because he has more of it? When will that appetite be satisfied? When the top 1 percent pay 99 percent of all taxes and the bottom 99 percent of earners pay none?

At root of this envy and covetousness is a misunderstanding of economics. Income transfers by the government create no new wealth, but do discourage investment and chase capital offshore to tax-friendlier havens. As we see with the nation’s massive debt, such favoritism in the spirit of “fairness” also can mortgage our children’s future. That’s a transfer of wealth often ignored by the advocates of redistribution.