Wednesday, March 30, 2011

Connection Between Wealth And Income Comment To The NY Times

My comment to The New York Times, "Inequality Is Most Extreme in Wealth, Not Income" by Catherine Rampell:
According to a Minneapolis Fed Study, Table 4,, wealth and labor income have a 0.27 correlation coefficient, i.e. income explains about 7 percent (0.27 squared) of wealth and vice versa.

When business income derived from business ownership and capital income are included, the correlation coefficient of income and wealth jumps to 0.60, table 3, (36 percent explanatory).

Even when labor, capital and business ownership incomes are combined, there is a low connection between income and wealth (64 percent of the connection is unexplained by just wealth and income).

When we measure things like poverty, income inequality, eligibility for low income, need based government programs, etc. that look at only income, some wealthy people are included. Surprisingly, wealthy people without income exaggerate inequality and poverty statistics because they show low income.

Part of the reason the wealthy do not show more income is to avoid paying income tax.

Income statistics overstate our perception of the needy and income inequality because the numbers include people with wealth without observable income, e.g. withdrawing and spending from savings is not income, a million dollar stock sale will likely result in a much lower capital income number (just the profit is reported as income).

In response, some in the US would like higher marginal income taxes, which motivates the wealthy to report less income and increases our income inequality statistics, causing another round of calls for higher taxes to redistribute from the rich to the poor in an endless, unsatisfactory spiral.

Wealth and income are two different concepts, but in the media and politics, the two are often used interchangeably.


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