Thursday, December 31, 2009

US Income Equality Would Create Political Instability And Unrest

When one considers income mobility in the US, one realizes that discussions about income inequality and wealth creation miss the main point. Achieving income equality and leveling wealth creation would lead to many more negatives than positives.

There is tremendous opportunity for individual wealth improvement in the US and the 'wealthy' and 'very wealthy' are an ever changing group of people from the lower income percentiles. This 'dynamism' is more prevalent in the US than any other country in the world. Policies to create income equality would remove this dynamic nature of our capitalistic economy and create true class warfare. It would lock people into their income percentiles. A Hyundai owner would never get rich enough to become a Mercedes owner. Wealth creation and extreme income gains are rare and it is its rarity that preserves our political stability. It gives hope to all that things will get better, that anyone can be a rich person, anyone can start a business, become a CEO, investment banker or top 100 lawfirm lawyer, etc.

For example:

There is considerable income mobility of individuals in the U.S. economy; half of taxpayers move to a different income quintile over 10 year periods.
About half of taxpayers who began in the bottom income quintile moved up to a higher income group.

A 2007 study found, "Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period."

The degree of mobility among income groups tends to be a stable phenomenon of the US.

See: [Link corrected].

Also see below from:

A 1992 Treasury Department study showed that between 1979 and 1988, 86 percent of those in the bottom income quintile moved to a higher quintile, and 35 percent in the top income quintile moved to a lower quintile.

A 1995 Federal Reserve Bank of Dallas report showed that almost three-fourths of those in the bottom quintile in 1975 were in a higher quintile by 1991, and almost 40 percent in the top quintile moved down to a lower quintile over the same period.

A 1996 Urban Institute study showed that large numbers of Americans move into a new income quintile, with estimates ranging from 25 percent to 40 percent in a single year. The same study found even higher mobility rates over longer periods: about 45 percent over five years and 60 percent over 9-year and 17-year periods.

In 1998, the Census Bureau reported that, on average, over 41 percent of Americans increased their inflation-adjusted income by 5 percent or more per year from 1984 to 1994.

The primary reasons for changes in income from year to year were changes in marital status, changes in the number of workers in the household, and moving into or out of full-time, year-round employment.

A 2000 Economic Policy Institute study showed that almost 60 percent of Americans in the lowest income quintile in 1969 were in a higher quintile in 1996, and over 61 percent in the highest income quintile had moved down into a lower income quintile during the same period.
A comment I posted on Mark Thoma's blog, Economist's View, "Is Our Tax System Helping Us Create Wealth?"

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