Income Inequality? Not Really

The U.S. Treasury Department has released a new study, "Income Mobility in the U.S. From 1996 to 2005."

This study examines income mobility of individuals over the past decade (1996 through 2005) using information reported on individual income tax returns.

While many studies have documented the long-term trend of increasing income inequality in the
U.S. economy, there has been less focus on the dynamism of the U.S. economy and the opportunity for upward mobility. Comparisons of snapshots of the income distribution at points in time miss this important dimension and can sometimes be misleading.

Economic historian Joseph Schumpeter compared the income distribution to a hotel where some rooms are luxurious, but others are small and shabby. Important aspects of fairness are that those in the small rooms have an opportunity to move to a better one, and that the luxurious rooms are not always occupied by the same people. The frequency with which people move between rooms is a crucial aspect of the trends in income inequality in the United States.

The key findings of this study include:

• There was considerable income mobility of individuals in the U.S. economy during the 1996
through 2005 period with roughly half of taxpayers who began in the bottom quintile moving
up to a higher income group within 10 years.

• About 55 percent of taxpayers moved to a different income quintile within 10 years.

• Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25
percent remained in this group in 2005. Moreover, the median real income of these
taxpayers declined over this period.

• The degree of mobility among income groups is unchanged from the prior decade (1987
through 1996).

• Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to
2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation.
The real incomes of two-thirds of all taxpayers increased over this period. In addition, the
median incomes of those initially in the lower income groups increased more than the median
incomes of those initially in the higher income groups.

The degree of mobility in the overall population and movement out of the bottom quintile in this
study are similar to the findings of prior research on income mobility.

Says the Wall Street Journal:

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.