A society in which everyone, especially the middle class, has an opportunity to increase their compensation level at an annual pace that outpaces inflation, is a dream for just about everyone, regardless of political beliefs. This of course requires a robust economy and a balance of trade such that a country can both produce and consume.
But recently, the chatter of “income inequality” among commentators and the news media has grown to a fever pitch. It is also a constant rallying cry of the Presidential candidate pool. In a recent ABC news article, Larry Mishel, Distinguished Fellow at the Economic Policy Institute, a left-leaning think tank, puts it bluntly: “Working people have taken it on the chin for many decades. They’ve not been able to get the help of government to be on their sides, the employers are suppressing their wages.”
This is how the media, politicians and academics typically interpret government economic data and the marginalization of the blue-collar worker and the middle class – and it has become the industry standard view of income inequality overall in the United States.
But is it accurate?
This measure, Mishel argue, “fails to account for the one-third of all household income paid in federal, state and local taxes.” And “since households in the top income quintile pay almost two-thirds of all taxes, ignoring the earned income lost to taxes substantially overstates inequality.”
But how much? The authors argue that the Census Bureau does not account for $1.9 trillion in annual “transfer” payments from the government to American households in the form of Medicare, Medicaid and food stamp and other sources. In total, “Government transfers provide 89% of all resources available to the bottom income quintile of households and more than half of the total resources available to the second quintile.”
If you consider (and believe) these figures, the notion of income inequality is greatly reduced or dissolves entirely. Consider, then, that the “the average bottom-quintile household and the average second-quintile household receive government transfers of some $17 and $4 respectively for every dollar of taxes they pay.” Doing the math, “the average bottom-quintile household receives $45,389 in government transfers. Private transfers from charitable and family sources provide another $3,313. The average household in the bottom quintile pays $2,709 in taxes, mostly sales, property and excise taxes. The net result is that the average household in the bottom quintile has $50,901 of available resources.”
And what about the middle class? “the average middle-income household receives $17,850 in government transfers and pays an almost identical $17,737 in taxes, while the fourth and top quintiles of households receive government transfers of only 29 cents and 6 cents respectively for every dollar paid in taxes.”
Let’s put this in perspective of our world. According to Payscale, a typical blue-collar manufacturing worker with 8+ years of experience earns an average salary of nearly $40K. According to this interpretation, this person essentially gets to keep her entire income once transfer payments from the government are factored into account.
Whether you agree with income redistribution in part or full (or not at all), when looked at from this data vantage point, the arguments on both sides of the political aisle change entirely.
But who is right? It all depends on how you read the data, although the truth is likely, as always, somewhere in the middle.