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.

The Income Gap

Billionaire Warren Buffet is saying that he wants to be taxed more, saying that our current income tax rates are not progressive enough: "The taxation system has tilted towards the rich and away from the middle class in the last 10 years. It's dramatic; I don't think it's appreciated and I think it should be addressed." Buffet makes most of his money investing. Capital gains are taxed at a lower rate than the top income brackets. Low taxes encourage investment and economic growth, high taxes hurt investment and economic growth (and abortion groups that depend on Buffet's handouts). I am mystified at how the tax system is "tilted" toward the rich. The fact is that the richest 1% pay 37% of all income taxes! The bottom 50% only pay 3.3%! I think our tax system punishes achievement quite enough. But wouldn't taxing the rich more close the "income gap?" The media has recently sounded the alarm that the income gap is growing. A growing income gap is a good thing. That means the economy is growing. Everyone benefits from that, only the rich benefit more, because they have more money invested in the growing economy. If we punish them with higher taxes, they will be less likely to take risks with their money. Think of a small business owner with a new product he's excited about. Should he take out a second mortgage on his house in order to afford more employees? Higher taxes means a smaller potential payoff should he succeed, making him less likely to take on the risk. The income gap talk is nothing more than stirring up class envy.