A Different Look at After-Tax Income Inequality

Every presidential candidate promises to “reduce income inequality” by raising tax rates on the rich and increasing transfer payments (including tax credits and in-kind benefits) for the middle class.  Yet the widely-usedflawed data from Thomas Piketty and Emmanuel Saezexcludeboth taxes and transfers.   Income measures that exclude taxes and transfers cannot tell us whether taxes or transfers are high or low, and cannot be directly affected by higher taxes on some or higher transfers to others (because such policies are ignored in the data).A simple table adapted from the 2017 Consumer Expenditure Survey, from the Bureau of Labor Statistics, may be sufficient to show how crucial it is to take account of taxes (including refundable tax credits), and also to adjust average income for the different number of people and workers per household.Incomes are shown by fifths ( “quintiles”), with the lowest 20% on the left and highest on the right.The second row shows the “lower limit” of pretax income needed to counted be in each quintile.   The next two rows show mean (average) income before and after taxes.  The column at the far right shows a ratio of highest to lowest income, called the 80/20 ratio, which a common gauge of inequality.     It shows that the highest 20% earned 16.5 times as much as the lowest 20% before taxes, but only 12.5 times as much after taxes.  But simply adjusting household income for taxes is not enough.   Average incomes cannot be pr...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs