Sunday, May 07, 2006

Washington Post Calls for Income Redistribution

The Washington Post editorial board has been running an occasional series of opinions about the economic state of americans. Today's column titled "The Top Takes Off", the fifth in the series, bemoans what they see as the rising inequality of income.

Subtitled "That rhetoric about giveaways for multimillionaires? It's accurate.", the opinion gets off on a bad foot and never recovers, seeing as there is no "giveaway" for the rich, simply a "smaller taking away".

Further, they show an amazing socialist streak right off the bat:

THE QUEST for ways to reduce inequality begins with taxation. Unlike spending programs, redistribution through taxation is administratively simple; besides, putting money directly into people's pockets allows them to spend it on whatever they need most. But the tax tool has been wielded badly

Why are we on a quest to reduce inequality of income? Where does the constitution assign that task to the federal government? Why should the tax "tool" be wielded at all? The goal of the federal tax system should be to fund the necessary tasks of government, not serve as Robin Hood, repairing some perceived inequity of income.

But I want to focus on a single important failing of the opinion:

While the income of the families in the middle fifth of society has grown 12 percent since 1980, the income of the top tenth has grown 67 percent, and the income of the top 1 percent has more than doubled. In short, the rich have grown a whole lot richer: That's why they pay a larger share of total tax.

There are three fallacies in that short excerpt.

  1. the people move around in the quintiles over the years. The top salaries more than doubled, but not necessarily the salaries of those who were in the top 1% in 1980.

  2. In a rising employment market, adding new inexperienced workers at lower pay will drive down the average incomes by "quintile", and effect lower quintiles more than upper quintiles.

  3. The explosion of two-income families shows up as a great increase in the average salary of families in the upper quintiles, while driving down the average in lower quintiles.

The use of "percent of population" statistics can easily lead to wrong conclusions. In the "quintile" system the population is broken into 5 equal parts, based on the criteria selected. The "top 1%" refers to whoever in a particular year made more money than 99% of the population.

I've got a lot of ways to show the difficulty of evaluating economic "fairness" based on quintiles. Here's one. I'll use small numbers, let's pretend they are hourly wages.

Let's say we have 5 workers, making $10,$15,$20,$25, and $30 an hour. Each worker makes up a quintile, so the quintile "average wage" is (10,15,20,25,30).

Now, let's say we feel really sorry for the poorest person in our group. So we pick him for a new job, which pays $50 an hour. Our program effected workers IN the quintiles as follows (percent increase in salary) (500%, 0%, 0%, 0%, 0%). Clearly our program targetted the least among us.

But, the person at the bottom just jumped to the top. So in fact the quintiles are now: (15,20,25,30,50). And the percent change, by quintile, is (50%, 33%, 20%, 17%, 66%). Looking at it by quintile, it appears our program helped the rich the most, and really cheated the middle class.

Using that illustration as a guide, it should be easy to see how adding large numbers of low-income workers would pull down the averages in all quintiles, and how two-income families will make higher quintiles salaries rise.

You don't want to look at the salary increase for a quintile, you want to look at the salary increase per working family.

I have no doubt that year to year, the salaries of the people in the top 1% grows faster than the salaries of the bottom 1%. If you used as an example salaries for major league baseball players, I bet the pay of the top 1% has increased faster than the increase of the bottom 1%. The reason is simple. There is a minimum salary, and the bottom 1% will always make that minimum salary. SO the bottom 1%'s salary growth will be at whatever rate the minimum salary rises, which may be 0%. This is true even though every player might get a salary increase int he next year -- because the lowest 1% will be re-populated with new workers.

Meanwhile, the salaries at the top are based on the best players wanting to be sure they get paid MORE than last year's top players. Since there is no theoretical limit on the top salaries, there is no lmit to the growth of the salary of the top 1%.

The Washington Post does a disservice to it's readers by trying to stir up envy, jealousy, and resentment. They tell people to measure their success not by their own improvement, but based on the fortunes of whoever in a particular year were the most lucky among us. No matter if you have enough money to live, or got a good raise -- someone else got a much bigger raise, and though it doesn't effect you at all, you should only feel good if government takes their money away and gives it to you.

In fact, the Post proposes to raise the tax rate 5% on the top 1%, just so they can five that money to the lower quantiles -- a direct transfer of wealth from rich to poor, as certainly as Robin Hood.

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