Monday, September 16, 2013

Income Inequality


Recently, my local newspaper (Connecticut Post) ran an article with a large bold headline that read, “ Top 1 percent takes rising share of 2012 U.S. income.” The article was based on figures from the Census Bureau that compared incomes among various statistical groups from the year 2000 to 2010. The headline and the findings in the article were supported by huge chart that took up most of the front page of the Business section.

The Connecticut Post likes to run stories like these since they seem to provide hard statistical evidence for its pet issue of inequality in Connecticut, whether it be racial, gender or economic. Hearst Connecticut Newspapers, the parent company of the newspaper, even went so far as to commission a study of the census figures by a University of Connecticut economist. Nevertheless, a review of the chart once again illustrates the old adage that “statistics don’t lie, but liars use statistics.”

At the top of the chart was the astonishing figure that the top 1% of the population in Fairfield county showed an increase in income in 2010 that was 14.5% larger than its comparable income in the year 2000. At the same time, income in every single other income bracket decreased during the same period. For example, the bottom 5% of Fairfield county’s population saw a 16.7% drop in income from 2000 to 2010.

What are we to make of these figures? The paper’s own chart belied the obvious conclusion it drew. In the same period the top 5%, which we also include the top 1%) actually saw their income drop by 9.8% in the same period. The Connecticut Post did admit that top earners suffered most in the “Great Recession” of 2007-2009. So what explains the figures?

Let’s look at the top 1% first. Fairfield County has a population of about 900000 so the top 1% would include about 5000 households. You would have had to read very deeply into the article to see that the income figures include not just salaries but also dividends and capital gains. The paper even explained that the more recent figures might be skewed by the fact that stockholders might have been taking capital gains from the sale of real estate and stock in anticipation of federal increases in tax rates. In other words, the wealthy were selling already owned assets and the gains inflated their incomes.

Other social and economic factors might have been at work. I would guess that during the decade that began with the attack on the World Trade Center, some wealthy New Yorkers decided to move our of Manhattan to Connecticut. Also, Greenwich, Connecticut lies just over the border from New York’s posh Westchester County. Not only are New York State’s income taxes higher than Connecticut’s (New York is not called the Empire State for nothing), but also real estate taxes in Westchester are substantially higher than those in Greenwich. Rather than a bad thing, the influx of wealthy people into Connecticut is a good thing for Connecticut. The top income households in the state pay much more than their fair share of taxes, and receive far less than their share of benefits from the state.

Speaking about benefits, what about the low-income households at the bottom of the chart? The bottom 10% had an income drop of 16.7% during the decade while the bottom 5% showed an income drop of 16.7%. Buried inside the paper the last sentence of the article admitted that the income figures did not include “so-called transfer payments from government programs such as unemployment benefits and Social Security.” Since everyone knows that such government benefit programs have increased dramatically in recent years, it is not hard to conclude that the bottom percentiles did not actually show a decrease in actual income.

Of course, benefits like food stamps and Medicaid only come from the taxes paid by those in the higher percentiles. I don’t know what the figures in Connecticut are but in this country the top 1% pay about 40% of all Federal income taxes. It would be better and more accurate if the paper’s chart had shown the actual after tax income of the various groups.

I don't deny the existence of income inequality but I do not believe that the Census figures show that it is growing. Moreover, unlike the Connecticut Post I do not believe that income inequality is necessarily a bad thing. No one ever suggests that athletes or entertainers should all work for the same pay. Even the most liberal Hollywood stars would be shocked at the idea. What then is so bad about an executive making a bonus if he does a great job?


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