ON ECONOMIC MOBILITY IN AMERICA

A DIFFERENT PICTURE

"You've got to blog about this", said my wife, as she passed the Barron's article my way this Sunday. 

Since it's the first time she's ever suggested a topic for me to blog on, in the almost four years I've been blogging, I knew it was something particularly potent.

I think it is, but you be the judge. 

It's this Barron's op-ed piece titled "Two Americas, or One?", and it makes timely reading, especially as we all go into Super Tuesday tomorrow.  Here's the main thesis:

"THERE'S NEWS FROM THE FRONT IN THE CLASS WAR. The Department of Treasury recently released an important study on economic mobility and income growth that refutes a great deal of conventional wisdom about America being two unequal countries.

The study shows that there's been a great and continuing degree of income mobility and income growth over the last two decades.

By undercutting the case for progressive taxation and interventionist spending, it argues strongly for the free-market policies needed to sustain America's economic vibrancy."

Familiar ground, but here's the data:

"The Treasury study examined the cash-income changes reported on almost 100,000 income tax returns covering people aged 25 to 64 who filed for tax years 1996 and 2005. The study excluded those just entering or exiting the workforce, when income would dramatically increase or decrease, and adjusted for inflation, so that it reflected only real income changes.

The study is available on the Treasury Department's Website (http://www.treas.gov/press/releases/reports/incomemobilitystudyfinal.pdf), but here are some highlights:

Almost 58% of those in the lowest income quintile (the lowest 20% of returns) in 1996 were in a higher quintile by 2005. Almost half of them had moved up two or more quintiles, and 5% had moved into the top quintile.

The middle quintile also did well. One-third stayed there, and 42% moved up, almost 13% to the top quintile. Just 7% moved to the bottom.

The top quintile from 1995 saw almost one-third of its members drop to a lower income group. (And 58% of those in the top one percent had fallen to a lower income quintile in 2005.)

Overall, 56% of the studied returns changed income quintiles in 10 years.

Absolute and Relative Gains

Households didn't just move relative to each other. Incomes increased 24% overall and increased across the income spectrum -- except at the very top end. The increases were most dramatic in the lowest quintile.

Their median real income increased by 90%, almost doubling in ten years. In the top quintile, median real income increased by 10% and decreased by almost 26% for the top one percent."

And of course, the punch-line:

"Important conclusions for the U.S. economy arise from the Treasury study.

There is no need for a redistributive tax system. Income redistribution is already being accomplished -- not by government, but by earners' own mobility.

America is not a nation in stasis. Individuals are not permanently placed on the income ladder as a matter of luck, justifying high taxes on the luckiest. The movement of individuals between income classes is not the exception but the rule.

Higher taxes discourage the natural and necessary movement of individuals on the income ladder..."

"There are indeed two Americas, but not the two we often hear about. One America is the land of opportunity, the other is a land of unequal taxation.

Fortunately, the first is still stronger than the second."

The entire piece is worth reading, and the study worth pondering.  It's hard, but one needs to resist the temptation to try and explain the results on political partisan grounds. 

At the same time, we likely need to resist partisan calls to tinker with something that's likely not as broken as many may assume.

Comments

[Michael Broder]

Michael,

This is indeed interesting data and suggests a certain dynamic within the economy that is positive over the '96 - '05 period.

However, I'm trying to reconcile it with another study of IRS data that was reported on by the NY Times back in October (http://www.nytimes.com/2007/10/12/business/
12tax.html?_r=1&ref=business&oref=slogin)

This study for the period 2000-2005 showed that 95% of tax filers had declines in real pre-tax income over the period. The next 4% of filers had a paltry 0.1% increase in pre-tax incomes and the top 1% had a 1.5% increase.

The study also looked at after-tax real income. All groups had increases in after-tax income.

The message here is that tax cuts were the only source of income growth for nearly 99% of tax filers. This was during a time of economic expansion (except for the brief recession around 9/11) and rising fiscal deficits.

Since Personal Consumption Expenditures (PCE) make up 70% of our economy, I question the health of a system that relies on borrowing from future generations to fund current period expenditures and economic growth. Something is wrong when nearly 99% of tax filers don't have growth in pre-tax income over five years.

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[alex tolley]

Couple of points:

1. Why the 1996 - 2005 time period? That spans 2 different administrations with differing policies?

2. Other studies have shown an accelerated decline in real incomes for the lower quintiles since 2000. (See point 1).

3. Studies of income mobility across countries now show the US lagging the EU.

4. The Piketty/Saez study confirmed the increasing income disparity in the US. Also real incomes have mainly increased for the higher quintiles.

5. The conclusion is unwarranted. There is no reason to suggest that income redistribution via taxes would affect income mobility as stated in the study. It assumes that income mobility and taxes are in some way linked, with no data supporting that link.