A Stitch in Haste

The Urban Institute has a one-page report suggesting that income inequality has deteriorated in the United States during the period 1979-2002. They provide a pair of graphs:


(Click to enlarge.)

I don't necessarily dispute the accuracy of UI's data (but see my note below) — in a semi-capitalist semi-meritocracy such as ours there is simply going to be income inequality. Having said that, any time series analysis of income inequality in the United States will inevitably be flawed for two reasons:

1. Such studies ignore the astounding mobility of income segments in the United States over time. The individuals in the top 1% of incomes in 2002 are not the same people who were in the top 1% in 1979. The same cannot generally be said about socialist economies, where "class" is a far more enduring concept.

2. Worsening income inequality in the United States does not mean that "the rich get richer while the poor get poorer. It means that the poor get richer, just not to the same extent as the rich get richer.

In any case, I'm more interested in the change in tax progressivity represented by UI's numbers. (NOTE: Here I actually am annoyed with UI's data, because they never specify exactly which taxes they're talking about. I'm presuming they mean the three major federal individual taxes — the federal income tax, the Alternative Minimum Tax, and the federal gift and estate tax. Of course, the highly progressive nature of Social Security benefits, not to mention the progressivity of state and local taxes, mean that any analysis of federal tax progressivity will be understated.)

Here's a table showing tax progressivity (i.e., pre-tax share of income minus after-tax share of income) in both 1979 and 2002. A negative number means the segment is burdened by progressive taxation, while a positive number indicates the segment is benefiting from progressivity:


(Click to enlarge.)

The column labeled "Change" shows how much worse the progessivity burden has grown from 1979 to 2002 (so, again, a negative number is bad).

Some hasty stitches:

--Progressivity has increased for high-income segments. The idea that "the rich don't pair their fair share" is simply false.

--Note who benefits from tax progressivity: not the poor at all, but the middle 20%. To some extent this is not surprising, since the lower 50% of households pay no income tax. It's hard to get more progressive than "the poor pay zero."

Meanwhile, look at the middle 20% row (i.e., the middle class). They are actually beneficiaries of progressive taxation, not contributors to it. And the taxation subsidy they are receiving has increased during the 1979-2002 period. Indeed, not only is the tax burden of high-income households rising to subsidize the middle class, but so is the relative tax burden of the poor -- all to support the middle class, not the rich.

The pending retirement of the Baby Boom generation, not to mention the new Medicare prescription drug benefit will only exacerbate this trend, as would the expiration of the Bush tax cuts.

If you care about the poor, then it's not the rich you should be indignant towards, but the middle class. They are the ones who, to use the obnoxious lexicon of the progressives, "don't pay their fair share."