Commentary: The Debate Over Income Inequality

The evil of “Inequality” has always been a rallying point for advocates of socialism. In 2013 the publication of Capital in the Twenty First Century by French economist Thomas Piketty stimulated a new wave of debate. The title was a takeoff from Karl Marx’s seminal Capital, published in three volumes between 1867 and 1894.

Sen. Bernie Sanders, a proud socialist, has raged against income inequality throughout his adult life. In 2015, running to be the Democratic Party’s candidate for President (although having repeatedly refused to actually join that party), Bernie told voters that “the most important issue facing the American people is the grotesque level of income and wealth inequality.” His speeches almost inevitably demand that inequality be remedied by having the government force the unworthy rich to pay “their fair share”, although I can’t recall Bernie ever offering an actionable definition of “fair share” beyond “lots more”.

The debate following the appearance of Piketty’s book featured heated attacks and counterattacks among socialist and free-market economists. The most telling counter argument focused on Piketty’s use of “income inequality” without considering the value of government transfer payments and government reduction of income via taxes.

Now comes Phil Gramm to conclusively settle the debate, at least in the U.S.. Gramm was professor of economics at Texas A&M for twelve years before serving 23 years in Congress and chairing the Senate Banking Committee. He enlisted two acknowledged first-rank experts in U.S. economic statistics, Robert Ekelund and John Early. They set out to plunge into the official economic data compiled by the Census Bureau and the Bureau of Labor Statistics to find out just how much inequality of income exists in our economy. They quickly discovered that the data from those agencies is unfortunately not in agreement.

The result of their research – exhaustively documented – is, in three admirably succinct paragraphs, this: “Remarkably, the Census Bureau chooses to count only $0.9 trillion of that $2.8 trillion in government transfer payments as income for the recipients of those transfers, counting only eight of the more than one hundred federal transfer program and only a select number of state and local transfer programs. Excluded from the measurement of household income are some $1.9 trillion of government transfers - programs like refundable tax credits, where beneficiaries get checks from the Treasury; food stamps, where beneficiaries buy food with government debit cards; and numerous other programs such as Medicare and Medicaid, where government directly pays the bills of the beneficiaries.”

“Americans pay $4.4 trillion a year in federal, state and local taxes.82% of which are paid by the top forty percent of household earners. Even though most households never see this money, because it is withheld from their paychecks, the Census Bureau doesn’t reduce household income by the amount of taxes paid when it measures income inequality…”

“In this book [The Myth of American Inequality] we will show that when all transfer payments, not counting government’s administrative costs in making the transfers, are counted as income of the recipients of those payments and when all taxes paid are counted as income lost to the taxpayers, the measurement of income inequality in America is profoundly altered. ..Accounting for all transfer payments and taxes yields a measure of income inequality that is only one fourth as large as the official Census measure… The ratio of income for the top 20 percent of households to the bottom 20 percent is 4.0 to 1 rather than the 16.7 to 1 ratio found in official Census numbers.”

Mastering the factual argument supporting this copiously documented conclusion is difficult going for non-economists, but the conclusion is iron-clad, and needs to be kept clearly in mind when Sen. Sanders and his allies declaim against “obscene” income inequality.

Some of the book’s policy recommendations are of course debatable. What is not debatable is the need for government to start reporting income inequality correctly.  And in this book the important question of wealth inequality is only glancingly addressed.

The co-authors propose to reduce income inequality, not by confiscating the earnings of the unworthy rich and bestowing them on the poor, but by reshaping policies and programs to promote self-sufficiency. (Forgive me for mentioning that in 1990 I wrote a book describing the Oregon Full Employment Plan to do just that.)

As Gramm and his co-authors put it, “When we as individuals lend a helping hand, we help others up. But if all our government does is provide subsidies to those who have fallen, it is letting them down and too often keeping them down.”


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  • John McClaughry
    published this page in EAI Commentary 2023-08-07 01:41:57 -0400