Income Inequality, Under the Microscope
In recent decades, supply-side economists have claimed that tax cuts to the rich have boosted the economy by promoting more jobs, which have benefited everyone – creating broad-based prosperity that has equally lifted all boats. Others have claimed that’s a myth, that supply-side policies favor the rich at the expense of the poor, creating income and wealth disparities that promote economic inequality.
So, who’s right? To answer that question, we must follow the money. What we really need is to track incomes over time to see if they are becoming more or less equal. But we must be careful to look at more than incomes. As supply-siders will be quick to point out, annual income is only part of the story. For example, rich people pay more in taxes than poor people. And poor people get a lot of benefits from the government – such as social welfare programs, like food stamps, and health care programs, like Medicare and Medicaid. Some would say they are the takers.
So we need to compare net incomes after adjusting for all those taxes and benefits. That is the only possible fair comparison. In 2011, The Congressional Budget Office published that exact study – of American household incomes over a 28 year period– an entire generation that spans the interval from the beginning of Reagan’s first term to the end of George Bush’s second term. Those were the two most supply-side oriented Presidents in history. Let’s take a look.
Imagine that all American households are divided into five equal boxes from the lowest income to the highest so that we can compare the percentile rankings over this 28 year period. First, we can see that income at the 20th percentile, the top of the bottom tier, advanced from $19,000 to just $23,000 after adjusting for inflation – a 23% relative increase over 28 years. That’s actually rather disappointing, less than 1% improvement per year.
Moving up the ladder, those at the 40th percentile had a 30% increase. And the next two groups did even better, advancing by 39% and 47%. Now that’s interesting. The higher the income in 1979, the greater the percentage increase over time which makes the differences get even bigger. That’s what we mean by growing inequality. Now, what happened at the very top? The income at the 99th percentile grew by an astonishing 118%, more than doubling in size. It seems the economy has not been equally kind to everyone.
While household income at the first tier grew by barely more than $4,000, income at the top tier grew by more than $160,000. And this is after accounting for all the taxes paid by the rich, and all the benefits received by the poor – all the giving and all the taking. It seems the tide is not lifting all boats. Myth busted.