Earlier this week, President Obama repeated an all-too-familiar talking point in an attempt to justify increasing taxes on the wealthiest Americans. "What drags our entire economy down is when the benefits of economic growth and productivity go only to the few, which is what’s been happening for over a decade now," he said, "and [the] gap between those at the very, very top and everybody else keeps growing wider and wider and wider and wider.”
In essence, President Obama believes that the living standards of middle-class Americans have remained stagnant while wealthier Americans have grabbed up all the money in recent years. It's time to raise their taxes and spread the wealth around -- after all, that would be the "fair" thing to do, right? Wrong.
Philosophical arguments aside, Obama's off base here not just for his flawed redistributionist philosophy, but because his ideas rely on the very incomplete research of two economists, Thomas Piketty and Emmanuel Saez. According to them, median American incomes rose just 3.2% from 1979 through 2007 (adjusted for inflation). What's wrong with this? It's just plain wrong, according to a new study from economist Richard Burkhauser and other researchers at Cornell University.
The Cornell study shows that while Piketty and Saez's work isn't necessarily wrong, it's just massively and utterly incomplete. According to the Cornell study, median household income--when properly measured--rose 36.7%, not 3.2% like Piketty and Saez argue. Why the discrepancy?
AEI's James Pethokoukis explains:
Yes, the very rich did exceptionally well, mostly due to technology and globalization. Incomes rose 63% for the top 5%, 56% for the top 10% and 52.6% for the top 20%. But everyone else made out pretty well, too. Incomes rose 40.4% for households between the 60th and 80th percentiles, 36.9% for the next quintile, 25.0% for the next, and 26.4% for the bottom 20%. There’s the “shared prosperity” Obama says he wants, right in front of his eyes. (Indeed, the study finds, income inequality has actually been shrinking since 1989, with the Gini index falling to 0.362 from 0.372.)
Piketty and Saez made lots of odd choices about what to measure and how to measure it. They chose to measure something called “tax units” rather than households, a move which ignores the statistical impact — including economies of scale — of couples who cohabitate, kids who move back in with their parents after college, and senior parents who live with their adult children.
They chose to ignore the value of all government transfers — including welfare, Social Security, and other government provided cash assistance — received by the household.
They chose to ignore the role of taxes and tax credits.
They chose to ignore the value of healthcare benefits. In short, Piketty and Saez ignored a lot of stuff.
Thus, the Cornell study concludes:
Income inequality increased in the United States not because the rich got richer, the poor got poorer and the middle class stagnated, but because the rich got richer at a faster rate than the middle and poorer quintiles and this mostly occurred in the 1980s. .. the apparent failure of the median American to benefit from economic growth can largely be explained by the use of an income measure for this purpose which does not fully capture what is actually happening to the resources available to middle class individuals.
In the end, the data used by the Obama administration to justify their radical tax agenda are fundamentally flawed and, as a result, the president is blind to what has actually been happening with the resources available to middle class individuals. When you take it all into account rather than selectively picking and choosing which statistics to look at, middle class Americans are found to have made substantial gains over the last three decades.
"The inequality and stagnation alarmists were wrong. And so, therefore, is the economic rationale of the president’s class-warfare economic policies," Pethokoukis concludes. "Not that economics ever had much to do with them anyway."