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November 30, 2006

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This subject is endlessly complicated, but it's worth pointing out that one reason "income inequality" has gone up in the last couple decades is that we reduced the absolutely punitive top marginal tax rates. It's no surprise that inequality went up, but it's hard to argue that we ought to go back to those punitive rates.

Secondly, the idea that real wages have declined is based on poor metrics and political unwillingness to change those metrics. (I'd also note that it's no accident that critics cite "wages" rather than total compensation) Essentially, we use CPI as a measure of inflation, even though (a) it is not and (b) even the BLS acknowledges that it is not, yet it overstates inflation and has done so for decades. I can't put it better than Paul Krugman once did when he wrote that "the whole story about workers not sharing in productivity gains will turn out to have been based on a statistical illusion" and that...

one thing is now clear: the truth about what is happening in America is more subtle than the simplistic morality play about greedy capitalists and oppressed workers that so many would-be sophisticates accepted only a few months ago. There was little excuse for buying into that simplistic view then; there is no excuse now.
With the exception of a few relatively tax-sensitive (and globally mobile) very high income earners, our tax system is effectively progressive at every level.

Some questions for you before you buy into all of this. When he says average, is he refering to mean or median and do you know what differences that would have on the data? When dealing with tax income over time, do you know what effects various tax reforms have had on income tax data? Do you know the effects of S-class corporations on tax data and how that can effect these numbers? Do you know what changes in demographics have occurred and how much, or little, they explain some of this? What measure of inflation was used to determine 'real' gains and is this measure the best one? Are there other inherent problems in trying to use tax data to divine income inequality? How is income related to hours worked in the various quintiles?

Until you can answer these questions, you don't even know what the article is saying, let alone if it is accurate.

Here is a hint though, this is 'shocking' because it simply is not true.

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