Congressional Budget Office Study On Income Inequality Is Misleading Hot

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While I trust that CBO has done the arithmetic correctly, the way CBO set up the study makes its conclusion extremely misleading.
 
Cynics might say the beginning and end points of the study were manipulated to achieve a desired outcome.
 
Why? Because the study’s start-year, 1979, followed a flat decade for stocks whereas the study’s end-year, 2007, followed a more than doubling in the S&P 500 from 2002 to 2007.
 
Capital gains included in the 2007 after-tax income figure probably represent most of the increase in the top 1%’s share-of-income from 7.7% to 17.1% between 1979 and 2007. (I say “probably” because CBO doesn’t provide the actual capital gain figures for 1979 or 2007.)
 
Had the study’s beginning and end points both been years of “normal” realized capital gains, the step-up in share from 7.7% vs. 17.1% would be largely eliminated.  
 
Interestingly, the U.S. Census Bureau also just released an updated study5 of income distribution. Income distribution (in constant dollars) in 2010 has both flattened and shifted to the right compared to 20 and 40 years ago. Arithmetically, this means that the gap between median and mean incomes has widened, which class warriors point to as evidence of greater income inequality.
 
The data suggest, however, that today there are many fewer households in the $35K-$75K brackets because there are far more households in the brackets from $100K and higher. This is a good thing! It’s a rising tide lifting most boats!
 
Finally, as for “millionaires and billionaires” paying their fair share of taxes: The CBO study shows a steady decline from 1979 through 2007 in total federal taxes paid as a percentage of household income by taxpayers in the lowest bracket up through those in the 80thpercentile.
 
Based on this measure, the tax system has grow more progressive, not less. The top 1%’s taxes as a percentage of income significantly rises and falls with business income and capital gains tied to moves in the economy and stock market.
 
For advisors interested in posting content on their website or blog about the misleading conclusions in the CBO study, Advisor Products is releasing a video presentation about my view of the study, along with a script and slides.

 

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