Thursday, April 10, 2008

More Economic Myths: The Income Gap

Here is an excerpt from an article, again by Sowell, discussing the "income gap."

"Anyone who follows the media has probably heard many times that the rich are getting richer, the poor are getting poorer, and incomes of the population in general are stagnating. Moreover, those who say such things can produce many statistics, including data from the Census Bureau, which seem to indicate that.

On the other hand, income tax data recently released by the Internal Revenue Service seem to show the exact opposite: People in the bottom fifth of income-tax filers in 1996 had their incomes increase by 91 percent by 2005.

The top one percent -- "the rich" who are supposed to be monopolizing the money, according to the left -- saw their incomes decline by a whopping 26 percent.

Meanwhile, the average taxpayers' real income increased by 24 percent between 1996 and 2005."

Sowell explains why IRS data is a better indicator for income statistics than census data:

"That is why the IRS data, which are for people 25 years old and older, and which follow the same individuals over time, find those in the bottom 20 percent of income-tax filers almost doubling their income in a decade. That is why they are no longer in the same bracket.

That is also why the share of income going to the bottom 20 percent bracket can be going down, as the Census Bureau data show, while the income going to the people who began the decade in that bracket is going up by large amounts.

Unfortunately, most income statistics, including those from the Census Bureau, do not follow individuals over time. The Internal Revenue Service does that and so does a study at the University of Michigan, but they are the exceptions rather than the rule.

Following trends among income brackets over the years creates the illusion of following people over time. But the only way to follow people is to follow people."

The complete article is Here


firstclass said...

Maybe the top one percent, the super rich discovered (and even invented) new ways to report less income and thus, successfully paid less tax...

Julia said...

Could be. In my experience, the graduated income tax serves as an incentive to report less income across all levels. Ergo, the waitress who lived next to me in California who reported half of her income and received state subsidy for her apartment.

I think there is an assumption that the rich "cheat" more on their taxes, but I don't think that's necessarily the case.