The gap between rich and poor may not be quite what politicians say.
A growing number of prominent economists question how much the gap has widened between America’s richest and poorest, a divide that President Barack Obama is to highlight in his State of the Union address Tuesday.
These economists, mainly mainstream conservative thinkers, argue that the most commonly cited data on income inequality is derived from reported income before taxes and doesn’t count a wide range of benefits – ranging from tax breaks to government transfer programs – that paint a fuller picture, one that shows a smaller divide between rich and poor.
“There is a significant measurement issue,” said Donald Marron, a former director of the nonpartisan Congressional Budget Office and member of the Bush administration’s Council of Economic Advisers.
It’s not that there’s no gap. “The data show there is rising inequality,” Marron said. But the way it’s measured may change the scope.
Income inequality refers to the uneven distribution of income, derived from both wages and investment in financial markets or property. The phrase is now used so broadly by politicians that it can refer to gaps in education, job opportunities, skills, the effects of globalization, the pay divide and minimum wage. Obama himself is to touch on many of these Tuesday night.
“Those at the top have never done better,” he’ll say, according to his planned text. “But average wages have barely budged. Inequality has deepened.”
The most commonly cited income inequality numbers come from researchers Thomas Piketty and Emmanuel Saez. They’ve used data from tax returns dating back decades to calculate the distribution of national income across the population. Their most recent data found that national income overall grew by 1.7 percent in 2011 but by 11 percent for the top 1 percent of earners.
They base their findings on pre-tax income reported by tax filers, and that’s where the debate begins.
“The rise in American inequality has been exaggerated both in magnitude and timing,” wrote Robert Gordon, a Northwestern University professor who shook things up with his 2009 study “Misperceptions About the Magnitude and Timing of Changes in American Income Inequality.”
That study was published by the lofty National Bureau of Economic Research, and it set in motion other research offering alternative measures of inequality.
“By some measures inequality stopped growing after 2000 and by others inequality has not grown since 1993,” Gordon wrote in the 2009 paper.
His supporters argue that the Census Bureau’s Current Population Survey offers a better look at inequality. That survey is used to calculate the unemployment rate, but also weekly and hourly earnings. The census data also includes a value for so-called in-kind benefits, such as Social Security payments, health care coverage or food stamps. It’s why critics of income-inequality data frown on pre-tax income alone.
“It ignores lots of important social-welfare programs,” said Douglas Holtz-Eakin, another former CBO director and chief economic adviser to Arizona Republican Sen. John McCain’s failed presidential bid in 2008.
Using pre-tax income data alone misses the sundry government programs that provide a safety net to the poorest Americans, he said, adding that it “makes no sense. I think it’s indefensible.”
Richard Burkhauser, a Cornell University professor and internationally recognized researcher, came to a less pronounced income gap when using a broader definition than just pre-tax income from tax returns. He measured income after taxes, after transfers from social-welfare programs and using what he considers a more realistic gauge of profits, called capital gains.
Burkhauser said his own research now finds not much widening of inequality since 1993.
The results are “much more nuanced,” he said in a telephone interview from the University of Melbourne in Australia, where he teaches half the year.
Other prominent economists, including Harvard University’s Martin Feldstein, say that government data tells an incomplete picture about both rich and poor. His criticism dates to 1998, when the Federal Reserve hosted a panel on income inequality and he argued that poverty was a better focus.
“The difference is not just semantics. It is about how we should think about the rise in incomes at the upper end of the income distribution,” he said, arguing then as today that a change in income at the top doesn’t decrease the income of others.
“I think those issues are still there,” Feldstein told McClatchy, noting that data on consumption by the bottom 20 percent of earners tells a very different story from what’s derived from tax filings.
“At the bottom there is this strange discrepancy between what they appear to spend and what their cash income should allow them to spend,” said Feldstein.
This consumption beyond stated income could reflect a growing informal economy, where the poor are paid off the books in cash. Many extended families, especially immigrants, also pool resources.
“If we’re concerned about distribution, it ought to be about the poor, and reducing the number of poor and raising their incomes, and not about inequality per se,” said Feldstein, pointing to problems with tax data about the rich too.
The Census Bureau’s numbers don’t differentiate among people who make above $135,000 a year, meaning the data says little about the very rich.
Internal Revenue Service full-year data for 2010 showed almost 4.3 million filers with adjusted gross incomes of $200,000 or more. That’s just 3 percent of all tax filings.
Since 1986, many smaller corporations adopted a tax status that allows their owners to declare the company income on their individual taxes. It’s added to the number of high earners but it’s misleading, since profits are often reinvested in companies.
“It’s just distorted the comparisons over time,” Feldstein said.