The refrain is all too well known: The expansion of income inequality is a fatal flaw in capitalism and an “existential” threat to democracy. From 1967 to 2017, US income inequality rose 21.4%, and everyone from US senators to the Pope say this is an urgent problem. However, the data on which claims of income inequality are based are deeply flawed.
We have shown On these pages, the Census Bureau income data does not count two-thirds of all government transfer payments – including Medicare, Medicaid, grocery stamps, and about 100 other government transfer payments – as income to recipients. In addition, in the census data, taxes paid are not counted as lost income for the taxpayer. When official government data is used to address these shortcomings – defining income as people actually define it – “income inequality” is dramatically reduced.
We can now show that if you count all government transfers (minus administrative costs) as income for the recipient household, the household income is reduced by the taxes paid and two major discontinuities in the income inequality time series data caused solely by changes in the income are corrected Census Bureau data collection methods, claiming that income inequality is increasing on a secular basis, collapses. Income inequality in America is not only not growing, it is lower today than it was 50 years ago.
While inequality in earned income has grown over the past 50 years, real inflation-adjusted income in the bottom quintile, including the value of all transfer payments received minus taxes paid, has increased by 300%. In the top quintile, profit after tax only increased by 213%. As government transfers to low-income households exploded, their labor force participation collapsed and the percentage of income in the bottom quintile from government payments rose to over 90%.
In 2017, federal, state, and local governments redistributed $ 2.8 trillion, or 22% of the country’s household income. More than two thirds of these transfer payments went to households in the two lower income quintiles. Notably, the Census Bureau counts only $ 900 billion of that $ 2.8 trillion as income for recipients. Government transfers of around $ 1.9 trillion are excluded from the measurement of household income. This includes the earned income tax credit, the beneficiaries of which receive a check from the Treasury Department. Grocery stamps that beneficiaries can use to purchase groceries using government-issued debit cards; and numerous other programs where the government pays direct for benefits.