Refuting the Income Gap

The Wall Street Journal is reporting on a new study on American incomes between 1996 and 2005 conducted by the Treasury Department. Guess what? It doesn't give much credence to the populist, class envy messages that we've been hearing from the likes of John Edwards, Mike Huckabee, and Warren Buffet about a supposedly growing income gap.
The study examined the tax returns of 96,700 people over a ten year period. It showed that the poorest quintile actually saw the most growth (yes, adjusted for inflation) - their incomes were 90.5% higher in 2005 as compared to 1996. As the graph on the left shows, the poorer you were, the more income growth you had in the last decade. The top 5% actually saw their incomes drop 6.8%. In an impressive showing of upward mobility, 58% of those in the bottom quintile in '95 moved up at least one quintile. These data are even more impressive given the huge numbers of low skilled immigrants that have entered the economy in the last decade. The American dream appears to be alive and well. How should this data affect our view of the "income gap?"

All of this certainly helps to illuminate the current election-year debate about income "inequality" in the U.S. The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn't remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.
The great irony is that, in the name of reducing inequality, some of our politicians want to raise taxes and other government obstacles to the kind of risk-taking and hard work that allow Americans to climb the income ladder so rapidly. As the Treasury data show, we shouldn't worry about inequality. We should worry about the people who use inequality as a political club to promote policies that reduce opportunity.