New IRS data on income and inequality

The indispensable David Cay Johnston of the New York Times writes about new IRS data showing that average incomes declined from 2000 to 2004:

Despite significant gains in 2004, the total income Americans reported to the tax collector that year, adjusted for inflation, was still below its peak in 2000, new government data shows.

Reported income totaled $7.044 trillion in 2004, the latest year for which data is available, down from more than $7.143 trillion in 2000, new Internal Revenue Service data shows.

Total reported income, in 2004 dollars, fell 1.4 percent, but because the population grew during that period average real incomes declined more than twice as much, falling $1,641, or 3 percent, to $53,974.

... Analysis of the I.R.S. data by The New York Times found that average reported incomes fell or were virtually flat at the end of the period at every level of income except for the poorest 26 million taxpayers, the bottom fifth. Those impoverished taxpayers made less than $11,166 each in 2004 and had an average income of $5,743, up $135 or 2.4 percent, from the year 2000.

Here's the relevant graphic from the article:

Johnston's article also illustrates just how unequal the American economy has become over the last 25 years:

Incomes after 2000 fell the most among those at the top of the income ladder.

The top one-tenth of 1 percent, about 130,500 taxpayers, reported their average income fell almost 17 percent, to just under $4.9 million each in 2004. Because of the tax cuts after-tax incomes fell by a significantly smaller amount, 12.1 percent.

Still, those very top households, which include about 300,000 Americans, reported significantly more pretax income combined than the poorest 120 million Americans earned in 2004, the data show. This was a sharp change from 1979, the oldest year examined by the I.R.S., when the thin slice at the top received about one-third of the total income of the big group at the bottom.

Over all, average incomes rose 27 percent in real terms over the quarter-century from 1979 through 2004. But the gains were narrowly concentrated at the top and offset by losses for the bottom 60 percent of Americans, those making less than $38,761 in 2004.

The bottom 60 percent of Americans, on average, made less than 95 cents in 2004 for each dollar they reported in 1979, analysis of the I.R.S. data shows.

The next best-off group, the fifth of Americans on the 60th to 80th rungs of the income ladder, averaged 2 cents more income in 2004 for each dollar they earned in 1979.

Only those in the top 5 percent had significant gains. The average income of those on the 95th to 99th rungs of the income ladder rose by 53 percent, almost twice the average rate.

A third of the entire national increase in reported income went to the top 1 percent — and more than half of that went to the top tenth of 1 percent, whose average incomes soared so much that for each dollar, adjusted for inflation, that they had in 1979 they had $3.48 in 2004.

Because of cuts in the tax rate, the top tenth of 1 percent did even better than their rising incomes alone would suggest. For each inflation-adjusted dollar they had after tax in 1979 they had $3.94 left after taxes in 2004.

For the bottom 60 percent, their income taxes were so small in 1979 that the cuts did little to change their after-tax incomes. While their pretax average incomes fell by a nickel on the dollar from 1979 to 2004, their after-tax incomes fell by a fraction of a penny less.

It's shocking that the bottom sixty percent are doing worse than they were in 1979 - shocking that everyone doesn't know this, and shocking that our political system is not mobilizing to do something about it.

When I contacted him by email, Johnston reported that his data came from the data tables here. The paper based on those tables (PDF) includes a graphic that shows just how much the national income distribution has become skewed toward the very top:

For too long, any attempt to talk about inequality has been silenced with claims of "class warfare." I think the issue is finally going to come back to the forefront. Senator-elect Jim Webb of Virginia, in particular, has already written a Wall Street Journal op-ed about it:

The most important--and unfortunately the least debated--issue in politics today is our society's steady drift toward a class-based system, the likes of which we have not seen since the 19th century. America's top tier has grown infinitely richer and more removed over the past 25 years. It is not unfair to say that they are literally living in a different country.

Comments

[Jon Henke]

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.

[Dave Justus]

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.