Here are five startling facts:
* The American welfare state has almost eliminated poverty in this country.
* Over the past 75 years, income inequality has actually declined, not increased.
* Since the end of World War II, income has risen steadily for every income group, with the greatest increase in the bottom fifth of the income scale.
* More than half of the population earns very little working under the US tax system because taxable income replaces untaxed transfers.
* The United States has the most progressive tax system among all developed countries.
For an impeccably researched book that supports these conclusions with overwhelming evidence, check out The Myth of American Inequality by Phil Gramm (former US senator), Robert Ekelund and John Early (hereafter, GEE).
Let’s take a closer look.
Poverty. Ronald Reagan said, “We waged a war on poverty, and poverty won. If you follow the Census Bureau statistics, at least those reported prominently in the newspapers, you would be inclined to agree with him.
Here is the problem. In its standard measure of income, the Census Bureau only includes 8 of more than 100 federal transfer programs. Among the benefits it excludes are refundable tax credits, food stamps, Medicare and Medicaid.
Over the past 50 years, the value of taxpayer-funded transfer payments to the poorest 20% of US households has grown from an average of $9,677 to $45,389 in real terms. Counting these dollar-for-dollar transfer payments as income, GEE estimates that the true poverty rate in the United States is 2.5%.
By the way, that 2.5% includes people with mental illness, addictions, and other issues that are unlikely to be addressed by more food stamps or other entitlement spending.
How did GEE discover these facts? They did not go to do another census. Instead, they rely on data that the Census Bureau has collected for many years. They just present them in a more reasonable way.
Inequality. Do the rich get richer while everyone else’s welfare stagnates? You might be inclined to think so if you only read Census Bureau press releases. But in measuring inequality, the Bureau omits two-thirds of all government transfer payments received by those at the bottom of the income scale and also ignores taxes collected from those at the top.
This means that the Census Bureau ignores 40% of all income that is earned in transfer payments and lost in taxes.
While the Census Bureau tells us that the difference in income between the richest 20% of households and the poorest 20% is 16.7 to 1, if you add transfers and taxes, the difference is not than 4 to 1. While the Census Bureau tells us that inequality (as technically measured by a Gini coefficient) has increased over time, GEE finds that it has actually decreased by 3% since 1947.
Revenue growth. The US government uses five different price indices for various purposes. Unfortunately, those used to measure things like hourly earnings and household income are the least accurate and outdated in a decade.
The GEEs show that using the best measure of inflation (and taking transfers and taxes into account), all five income groups have experienced substantial growth in real income over the past 75 years, roughly quadrupling on average . The greatest growth in real income is among households in the bottom quintile (681%)—much more than those in the top quintile (456%).
Well-being vs work. While it may be comforting to know that the actual poverty rate is so low, it comes at a significant cost: welfare has replaced work.
Since the war on poverty began in 1965, the labor force participation of the poorest fifth of households – who now receive more than 90% of their income from the government – has fallen from 70% to 36%.
It is not difficult to understand why. The GEE takes into account taxes, transfers and the number of people living in each household. Then they divide the household into quintiles, based on labor income. The result: The bottom fifth of households, based on earned income, had an average income of $33,653 per capita. The second and fifth fifths, based on earned income, had $29,497 and $32,574, respectively.
Those with the least earned income had higher real income than those in the next two top quintiles! In other words, the average household in the bottom fifth (based on labor income) received 14% more income than the average household in the second fifth and 3.3% more than the average middle-income household..
International comparisons. A common assumption on the left is that European welfare states are more progressive than the American system. While it is true that a typical European country has more social insurance than we do, these programs are not primarily funded by taxing the wealthy. They are paid by the taxation of the beneficiaries.
Compared to our country, Europeans (especially Northern Europeans) have less private property and more social security.
GEE notes that the richest 10% of US households earn about 33% of all labor income, but pay 45.1% of all income taxes and payroll taxes. This progressivity ratio of 1.35 is much higher than in any other country. The ratio is 1.10 in France, 1.07 in Germany and 1.0 in Sweden.
So in 2015, the top 10% earners in the United States paid 45% of all income taxes. This contrasts with 28% in France, 31% in Germany and 27% in Sweden. Conversely, the bottom 90% of earners in the United States paid only 55% of all taxes, compared to 72% in France, 69% in Germany and 73% in Sweden.
Moreover, after the end of the EGE research, a more recent study found that the US welfare state is actually larger than European welfare states. The study concludes that “the United States redistributes a greater share of national income to low-income groups than any European country”.
Reflecting on the importance of their study, GEE draws our attention to an observation attributed to Mark Twain: “It’s not what you don’t know that gets you in trouble. It’s what you know is not so.
This article was also published in Forbes