Why America's Inequality Story Doesn't Add Up
Taxes, benefits, and household data make America look more unequal than it is.
If you're like most Americans, you get the bulk of your cardio from marching in—or fleeing from—pitchfork-wielding mobs. These days, those mobs tend to be chasing oligarchs with their fancy castles and grave-robbing sidekicks. Inequality, we are told, is spiraling out of control.
But that's wrong. America doesn't actually have an inequality problem. We have a measurement problem.
Most of the infuriating headlines about inequality rely on data from the Census Bureau. And when the Census Bureau calculates inequality in the U.S., it leaves out two very important things: taxes and redistribution.
The Census Bureau looks at pre-tax income. If you earn $100,000 a year and pay $20,000 in taxes, the Census Bureau counts you as earning $100,000, not the $80,000 you actually take home.
That missing $20,000 doesn't vanish. The federal government redistributes it to the lowest quintile of Americans through food stamps, housing vouchers, Medicaid, child tax credits, Section 8 housing subsidies, and dozens of other programs. But almost none of that is factored into inequality statistics. There are over 100 federal programs that each redistribute over $100 million a year. Yet the Census Bureau counts only eight of them as "income."
Most state and local transfer payments aren't counted either. In fact, roughly two-thirds of all government transfer payments to individuals and households never enter the inequality data at all, according to the Census Bureau data we calculated.
When you add those transfers and benefits back in, the average household in the bottom quintile of earners receives around $40,000 per year in cash and in-kind support—income that simply disappears from inequality charts.
So when people say "tax the rich people to fix inequality," that literally cannot work with how inequality is measured in America. According to our statistics, you could triple taxes on the wealthy and inequality would look exactly the same—assuming the rich didn't flee to Gault's Gulch, Heaton's Hollow, or the Buffet-Warren Tax-Dodge Zone and Water Park.
What about Europe, you ask, irritatingly. Europe is a nice place—good cheese, sort of England's chunky sidekick. But American taxation is actually more progressive than in Europe. Wealthy Americans fund a much larger percentage of our government than wealthy European vampires do in their countries. Europeans pay higher taxes not because they pulverize the rich, but because they tax their middle class more heavily and rely far more on sales taxes, which disproportionately impact the poor.
If your solution is to force corporations to redistribute profits more evenly, that runs into the same problem. The Census Bureau does not count employer benefits, such as health insurance premiums, dental and vision insurance, or Health Savings Accounts, as income. Much of what people call "wage stagnation" is compensation shifting into benefits that never show up in the data.
You can reasonably argue—and I would—that government spends our taxes in stupid ways: corn subsidies, upward transfers of wealth, military parades. We could also argue that government could better allocate resources to genuinely help people who need it. But that's a spending problem, not a revenue problem.
The measurement problems don't end there. When the Census Bureau began tracking household income in 1947, government officials treated women as wifely accessories or house pets and didn't bother keeping track of individual earnings. Instead, they tracked household income, treating husbands and wives as a single economic unit—a practice they still use today.
Since then, women have entered the workforce en masse, and couples increasingly marry within their income brackets. So imagine a lady lawyer earning $100,000 who marries a doctor earning $100,000, and I, a bachelor comedian, also inexplicably earning $100,000. Even though we all earn the same exact amount of income, the Census Bureau would report rampant inequality because my household only makes half of what theirs does. What is actually a pairing phenomenon gets misinterpreted as income inequality.
Income statistics are also snapshots in time, not reflections of a medieval caste system. Most people move between income brackets over the course of their lives. My first year out of college, for example, I earned basically nothing and sat in the bottom quintile. Since then, I have schemed, clawed, fought, and seduced my way into higher-paying and often legal jobs. While there are exceptions, the vast majority of Americans earn more at 50 than they did at 18.
So when looking at the (already flawed) inequality statistics over the last 60 years, we're not looking at the same poor and rich people. Between the ages of 25 and 60, three-quarters of American households will fall into the top quintile of income earners for at least one year of their lives.
To be clear, income inequality exists. But once you factor in taxes, transfers, benefits, and mobility, that gap is not as catastrophically chasmic as often portrayed.
Imagine there's a button that doubles everyone's real wealth: houses cost half as much, groceries cost half as much, and your paycheck goes twice as far. Everyone's life improves, but inequality explodes because the rich gain more dollars than the poor.
Would you hit that button?
I would, because I care more about poverty than inequality. I care more about raising the floor than lowering the ceiling.
