Quote of the Day: Thomas Sowell on Income Inequality

From Thomas Sowell in his book Economic Facts and Fallacies: Second Edition*:

One widely quoted study, for example, used income tax data to show dramatically growing income inequality among “tax units,” leaving the impression that there was a similarly sharp increase in income inequality among human beings. Some tax units coincide with individuals, some coincide with married couples, and some coincide with neither, because some of these tax units are businesses. Comparisons among such heterogeneous categories are comparisons of apples and oranges. In some media translations of these studies, these tax units are often referred to loosely as “families.”36 But a couple living together and filing separate income tax returns are not two families, and to record their incomes as family incomes means artificially creating two statistical “families” averaging half the income of the real family.

Tax laws changed significantly during the period when this dramatic increase in statistical inequality occurred, so that some income that had previously been taxed as business income was now being taxed as personal income, particularly at the highest income levels, where business income is an especially large share of total income. In other words, money that would previously not have been counted as personal income among the higher-income tax units was now counted, creating the statistical impression that there was a dramatic change in real income among real people, when in fact there was a change in definitions used when compiling statistics. This study mentioned such crucial caveats in a footnote but that footnote was seldom, if ever, quoted in the many alarming media accounts.

Just as income statistics greatly under-estimate the economic resources available to people in the lower income brackets, steeply progressive income taxes substantially over-estimate the actual economic resources at the disposal of people in the upper income brackets. Most income statistics count income before taxes and leave out both cash transfers and in-kind transfers from the government. Since most of the taxes are paid by people earning above-average incomes and most of the income of people in the lowest income bracket comes from government transfers, income statistics exaggerate the differences in actual standards of living. Disparities between A and B will always be greater if you exaggerate what A has and understate what B has.

Makes sense but unfortunately, it doesn’t get a lot of attention from main stream media and our politicians won’t gain votes talking about the issue from this perspective.

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3 thoughts on “Quote of the Day: Thomas Sowell on Income Inequality”

  1. And those are suicidal programs. We are rewarding failure and punishing success; rewarding stupidity and punishing intelligence.

  2. Income Inequality is certainly a factor in everyone’s life. It has been exasperated over the last 20 years or so. It’s a hot topic for selling newspapers and getting votes for politicians.

    The funny thing is, Sowell says all these comparisons are apples and oranges, but does he do an apples to apples comparison himself???

    Somewhere along the line, the people will rebel and pass laws that will soak the rich. It happened in post WWI (circa 1920) and it’s happen again.

    The trick to being rich is to be rich without making the masses resent you for it. That is an art that Bill Gates has learned, but most modern corporations and their CEO’s are clueless about.

    Perhaps Harvard Business School needs to add some classes on philanthropy to their curriculum???

  3. Sowell captures so many aspects of the “rich vs. poor” drama currently unfolding in this auspicious election year. However, it is impossible to argue the facts when the facts get obscured and buried in piles of statistics. There are two big misconceptions that never get explained in the mass media: 1. The groups (rich and poor) are not static, over time individuals move from one to another and through many groups in between. Its corollary is: wealth tends to accumulate over time. That is, as one ages and gains knowledge and value, he/she tends to become wealthier 2. Over the past 30 years, the wealthiest wage-earnings have increasingly been carrying a far greater share of the U.S. tax burden and, at the same time, the percentage of those who are non-taxpayers (i.e., the poor) has been trending upwards. The outcome – in 2010 the top 10% of taxpayers paid 73% of all federal income taxes collected. The bottom 40% of taxpayers actually got more back in the form of tax credits, deductions, and exemptions than they owed. To say it more clearly, the bottom 40% made money off the top 60% by doing absolutely nothing.

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