20% of Americans are in the Top 2%

For years I’ve been arguing that income distribution data is meaningless for all sorts of reasons. One is that it treats capital income and wage income as being equivalent. A second problem is the life cycle issue—I’ve been in all 5 quintiles at various times in my life, but I’ve never really been anything other than “middle class” in a sociological sense. (I started middle class and am now upper middle class.)

It seems the press is catching on to this problem:

Fully 20 percent of U.S. adults become rich for parts of their lives, wielding outsize influence on America’s economy and politics. This little-known group may pose the biggest barrier to reducing the nation’s income inequality.

The growing numbers of the U.S. poor have been well documented, but survey data provided to The Associated Press detail the flip side of the record income gap — the rise of the “new rich.”

Made up largely of older professionals, working married couples and more educated singles, the new rich are those with household income of $250,000 or more at some point during their working lives. That puts them, if sometimes temporarily, in the top 2 percent of earners.

Even outside periods of unusual wealth, members of this group generally hover in the $100,000-plus income range, keeping them in the top 20 percent of earners.

When I sell my rental unit and move to California I’ll have a huge capital gain, and be “rich” that year. It makes no different whether my real capital gain is zero, the government treats nominal gains as if they are “income,” and economists treat income inequality as if it actually measures “economic inequality.” The economic inequality debate is still pretty much in the Stone Age. GIGO.

Why does this matter? Consider all the progressives who wonder “what’s the matter with Kansas?” (I.e., why are our conservative opponents so stupid?) Have you noticed that they never ask what’s the matter with Washington, or Massachusetts? Maybe they should. Here are a couple examples:

1. Washington state has no income tax at all. And yet we are constantly told by progressives that “polls show” the public agrees with them. “Polls show” the people say “yes” when asked if it would be nice if the government would provide all sorts of free goodies to everyone. “Polls show” that voters like big government, and think the rich get off too lightly. So obviously if you had a referendum on replacing Washington state’s regressive Texas-style tax system with an income tax that only applied to the top 1.2% of residents, the liberal voters of Washington state would pass the referendum overwhelmingly. Or am I missing something? I guess I am, as in 2010 they rejected the proposal by the razor thin margin of 64% to 36%, despite the Bill Gates fortune bankrolling the “tax the rich” initiative.

2. Even more liberal Massachusetts has a flat tax with a top rate that is lower that the horribly regressive top rate recently set by the fanatical Tea Party GOP in North Carolina. Massachusetts is even more liberal than Washington state, with the GOP now almost completely extinct in the State House. So obviously if there were a referendum to make the income tax progressive, a proposal that would hurt only a “tiny number of taxpayers,” it would pass overwhelmingly, wouldn’t it? Nope.

There have been five past efforts to amend the constitution to allow for a graduated income tax, but each time—in 1962, ’68, ’72, ’76, and ’94—ballot referendums to confirm the amendments went down to defeat. All the referendum votes “have failed by wide margins,”

I hesitated to write this post. I’m actually glad that people who support progressive income taxes are so clueless about both income inequality and politics. It makes it much easier to defeat them politically.

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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