The Truth About Income Inequality

The census fails to account for taxes and most welfare payments, painting a distorted picture.

Never in American history has the debate over income inequality so dominated the public square, with Democratic presidential candidates and congressional leaders calling for massive tax increases and federal expenditures to redistribute the nation’s income. Unfortunately, official measures of income inequality, the numbers being debated, are profoundly distorted by what the Census Bureau chooses to count as household income.

The published census data for 2017 portray the top quintile of households as having almost 17 times as much income as the bottom quintile. But this picture is false. The measure fails to account for the one-third of all household income paid in federal, state and local taxes. Since households in the top income quintile pay almost two-thirds of all taxes, ignoring the earned income lost to taxes substantially overstates inequality.

Average earned and net income by quintile, 2017

$300,000

Earned income

250,000

200,000

Net transfers

Net taxes

150,000

100,000

Net income

Net income

50,000

Earned income

0

1

2

3

4

5

Source: Calculations by authors based on official government data

The Census Bureau also fails to count $1.9 trillion in annual public transfer payments to American households. The bureau ignores transfer payments from some 95 federal programs such as

  • Medicare,
  • Medicaid and
  • food stamps,

which make up more than 40% of federal spending, along with dozens of state and local programs. 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.

In all, leaving out taxes and most transfers overstates inequality by more than 300%, as measured by the ratio of the top quintile’s income to the bottom quintile’s. More than 80% of all taxes are paid by the top two quintiles, and more than 70% of all government transfer payments go to the bottom two quintiles.

America’s system of data collection is among the most sophisticated in the world, but the Census Bureau’s decision not to count taxes as lost income and transfers as gained income grossly distorts its measure of the income distribution. As a result, the raging national debate over income inequality, the outcome of which could alter the foundations of our economic and political system, is based on faulty information.

The average bottom-quintile household earns only $4,908, while the average top-quintile one earns $295,904, or 60 times as much. But using official government data sources on taxes and all transfer payments to compute net income produces the more complete comparison displayed in the nearby chart.

PHOTO: GETTY IMAGES/ISTOCKPHOTO

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.

Government transfers go mostly to low-income households. 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. 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. (In the chart, transfers received minus taxes paid are shown as net government transfers for low-income households and net taxes for high income households.)

The average top-quintile household pays on average $109,125 in taxes and is left, after taxes and transfer payments, with only 3.8 times as much as the bottom quintile: $194,906 compared with $50,901. No matter how much income you think government in a free society should redistribute, it is much harder to argue that the bottom quintile is getting too little or the top quintile is getting too much when the ratio of net resources available to them is 3.8 to 1 rather than 60 to 1 (the ratio of what they earn) or the Census number of 17 to 1 (which excludes taxes and most transfers).

Today government redistributes sufficient resources to elevate the average household in the bottom quintile to a net income, after transfers and taxes, of $50,901—well within the range of American middle-class earnings. The average household in the second quintile is only slightly better off than the average bottom-quintile household. The average second-quintile household receives only 9.4% more, even though it earns more than six times as much income, it has more than twice the proportion of its prime working-age individuals employed, and they work twice as many hours a week on average. The average middle-income household is only 32% better off than the average bottom-quintile households despite earning more than 13 times as much, having 2.5 times as many of prime working-age individuals employed and working more than twice as many hours a week.

Antipoverty spending in the past 50 years has not only raised most of the households in the bottom quintile of earners into the middle class, but has also induced many low-income earners to stop working. In 1967, when funding for the War on Poverty started to flow, almost 70% of prime working-age adults in bottom-quintile households were employed. Over the next 50 years, that share fell to 36%. The second quintile, which historically had the highest labor-force participation rate among prime work-age adults, saw its labor-force participation rate fall from 90% to 85%, while the top three income quintiles all increased their work effort.

Any debate about further redistribution of income needs to be tethered to these facts. America already redistributes enough income to compress the income difference between the top and bottom quintiles from 60 to 1 in earned income down to 3.8 to 1 in income received. If 3.8 to 1 is too large an income differential, those who favor more redistribution need to explain to the bottom 60% of income-earning households why they should keep working when they could get almost as much from riding in the wagon as they get now from pulling it.

How Blockchain Can End Poverty

Two-thirds of the world’s population lacks access to a formal system of property rights.

The great economic divide in the world today is between the 2.5 billion people who can register property rights and the five billion who are impoverished, in part because they can’t. Consider what happens without a formal system of property rights: Values are reduced for privately owned assets; wages are devalued for workers using these assets; owners are denied the ability to use their assets as collateral to obtain credit or as a credential to claim public services; and society loses the benefits that accrue when assets are employed for their highest and best purpose.

.. two-thirds of the world’s population lacks access to a formal system of property rights, resulting in undeveloped resources and assets worth an estimated $170 trillion, or 63% of the value of the assets of the U.S.

.. Hernando de Soto—discovered that even in the most primitive societies records exist on who owns what. Based on this discovery, ILD undertook an organized effort in Peru to begin to assimilate and formalize these records to establish a registry of property ownership.

.. We first collaborated in 1990 when Peru sought American assistance to replace the gun with the rule of law by officially recognizing that the indigenous Peruvians’ primitive property records were legal proof of ownership.

.. Blockchain is an especially promising technology because of its record-keeping capacity, its ability to provide access to millions of users, and the fact that it can be constantly updated as property ownership changes hands.

If Blockchain technology can empower public and private efforts to register property rights on a single computer platform, we can share the blessings of private-property registration with the whole world. Instead of destroying private property to promote a Marxist equality in poverty, perhaps we can bring property rights to all mankind. Where property rights are ensured, so are the prosperity, freedom and ownership of wealth that brings real stability and peace.

Everybody Hates the Trump Tax Plan

what people used to say about former Senator Phil Gramm .. “Even his friends don’t like him.”

.. the Senate version, which would

raise taxes on most individuals, especially in the middle and working classes, and 

add around 13 million Americans to the ranks of the uninsured,

all to pay for big cuts in corporate taxes.

.. After all, if we’re talking about a big increase in capital expenditure, where does the money for that expenditure come from? Nothing in the bill would make Americans consume less and save more. So the money would have to come from abroad — from selling stocks, bonds and other assets to foreigners, on a massive scale.

.. And this inflow of foreign money would drive up the value of the dollar and lead to huge trade deficits: according to my analysis of the most optimistic forecast out there, more than $6 trillion in deficits over the next decade. These trade deficits would have a devastating effect on manufacturing — remember those jobs Trump promised to bring back? — to the likely tune of more than two million jobs lost.

.. Nor does it take account of what would inevitably come next: tax-cut-induced deficits would, by law, trigger cuts in Medicare, and this would just be the start of a G.O.P. assault on programs like disability insurance 

.. “My donors are basically saying get it done or don’t ever call me again.”

The Quiet American

Paul Manafort made a career out of stealthily reinventing the world’s nastiest tyrants as noble defenders of freedom. Getting Donald Trump elected will be a cinch.

Mar-a-Lago, Donald Trump’s palace, is impressive by the standards of Palm Beach—less so when judged against the abodes of the world’s autocrats. It doesn’t, for instance, quite compare with Mezhyhirya, the gilded estate of deposed Ukrainian President Victor Yanukovych. Trump may have 33 bathrooms and three bomb shelters, but his mansion lacks a herd of ostrich, a galleon parked in a pond, and a set of golden golf clubs. Yet the two properties are linked, not just in ostentatious spirit, but by the presence of one man. Trump and Yanukovych have shared the same political brain, an operative named Paul Manafort.

.. “Manafort is a person who doesn’t necessarily show himself. There’s nothing egotistical about him,”

.. The late Washington Post columnist Mary McGrorydescribed him as having a “smooth, noncommittal manner, ” though she also noted his “aggrieved brown eyes.” Despite his decades of amassing influence in Washington and other global capitals, he’s never been the subject of a full magazine profile.

.. As Roger Stone has boasted about their now-disbanded firm: “Black, Manafort, Stone, and Kelly, lined up most of the dictators of the world we could find. … Dictators are in the eye of the beholder.” Manafort had a special gift for changing how dictators are beheld by American eyes. He would recast them as noble heroes—venerated by Washington think tanks, deluged with money from Congress.

.. he remade Ukrainian politics and helped shift the country into Vladimir Putin’s sphere of influence.It

.. The genesis of Donald Trump’s relationship with Paul Manafort begins with Roy Cohn. That Roy Cohn: Joe McCarthy’s heavy-lidded henchman, lawyer to the Genovese family.

.. It was Roy Cohn who introduced Stone and Manafort to Trump.

.. Dirty tricks came naturally to Stone. He assumed a pseudonym and made contributions on behalf of the Young Socialist Alliance to one of Nixon’s potential challengers. He hired spies to infiltrate the McGovern campaign.

.. Manafort had a very different mentor. He studied under the future secretary of state, James A. Baker III, who wielded his knife with the discipline of a Marine and the polish of a Princetonian.

.. “Paul modeled himself after Baker,”

.. Despite his Yankee stock, Manafort ran Reagan’s Southern operation, the racially tinged appeal that infamously began in Philadelphia, Mississippi, the hamlet where civil rights activists were murdered in 1964.

.. Manafort and Stone pioneered a new style of firm, what K Street would come to call a double-breasted operation. One wing of the shop managed campaigns, electing a generation of Republicans, from Phil Gramm to Arlen Spector. The other wing lobbied the officials they helped to victory on behalf of its corporate clients.

.. he began with his rote protestations of friendship. “Nobody likes Indians as much as Donald Trump.” He then proceeded to worry that the tribes would prove unable to fend off gangsters. “There is no way Indians are going to protect themselves from the mob … It will be the biggest scandal ever, the biggest since Al Capone … An Indian chief is going to tell Joey Killer to please get off his reservation? It’s unbelievable to me.”

.. Trump poured money into a shell group called the New York Institute for Law and Society. The group existed solely to publish ads smearing his potential Indian competition. Under dark photos of needles and other junkie paraphernalia, the group asserted, “The St. Regis Mohawk Indian record of criminal activity is well documented.” (It wasn’t.) “Are these the new neighbors we want?”

.. Later, they lured Lee Atwater, the evil genius who would devise the Willie Horton gambit for George H.W. Bush.

.. Black would later boast that the firm had schemed to gain cartel-like control of the 1988 Republican presidential primary. They managed all of the major campaigns.

  1. Atwater took Bush;
  2. Black ran Dole;
  3. Stone handled Jack Kemp.

A congressional staffer joked to a reporter from Time, “Why have primaries for the nomination? Why not have the candidates go over to Black, Manafort and Stone and argue it out?

.. He took on clients and causes that even most of his colleagues on K Street considered outside the usual bounds. Black, Manafort, and Stone hired alumni of the Department of Housing and Urban Development then used those connections to win $43 million in “moderate rehabilitation funds” for a renovation project in Upper Deerfield, New Jersey.

..  Local officials had no interest in the grants, as they considered the shamble of cinder blocks long past the point of repair.

.. Two years later, rents doubled without any sign of improvement. Conditions remained, in Mary McGrory’s words, “strictly Third World.” It was such an outrageous scam that congressmen flocked to make a spectacle of it. Manafort calmly took his flaying. “You might call it influence-peddling. I call it lobbying,” he explained in one hearing. “That’s a definitional debate.”

 .. Strangely, the HUD scandal proved a marketing boon for the firm. An aide to Mobutu Sese Seko told the journalist Art Levine, “That only shows how important they are!”
.. Indeed, Manafort enticed the African dictator to hire the firm. Many of the world’s dictators eventually became his clients. “Name a dictator and Black, Manafort will name the account,
.. The client list included
  1. Philippine strongman Ferdinand Marcos (with a $900,000 yearly contract) and the despots of the
  2. Dominican Republic,
  3. Nigeria,
  4. Kenya,
  5. Equatorial Guinea, and
  6. Somalia.
When the Center for Public Integrity detailed the firm’s work, it titled the report “The Torturers’ Lobby.”
.. Indeed, the firm was an all-purpose image-buffing operation. As the Washington Post has reported, Manafort could book his clients on 60 Minutes or Nightline—and coach them to make their best pitch. He lobbied Congress for foreign aid that flowed to his clients’ coffers.
.. Manafort understood the mindset of the dictator wasn’t so different from his corporate clients
.. Despite his client’s Maoist background, Manafort reinvented him as a freedom fighter. He knew all the tricks for manipulating right-wing opinion. Savimbi was sent to a seminar at the American Enterprise Institute, hosted by the anticommunist stalwart Jeanne Kirkpatrick, a reception thrown by the Heritage Foundation, and another confab at Freedom House. (Kirkpatrick introduced Savimbi, who conscripted soldiers, burned enemies, and indiscriminately laid land mines, as a “linguist, philosopher, poet, politician, warrior … one of the few authentic heroes of our time.”)
.. His lobbying helped convince Congress to send Savimbi hundreds of millions in covert aid. Indeed, every time Angola stood on the precipice of peace talks, Manafort, Black worked to generate a fresh round of arms—shipments that many experts believe extended the conflict.
.. “So the war lasted another two more years and claimed a few thousand more lives! So what? What counts to a Washington lobbyist is the ability to deliver a tangible victory and spruce up his client’s image.”
.. Like Henry Kissinger, Manafort can claim that he merely “consults” with foreign governments, relieving him of the legal burden of announcing his benefactors.