- The Washington Times - Wednesday, January 26, 2000

As the presidential election moves closer, advocates of class warfare are sharpening their tomahawks. A new report from two left-leaning think tanks laments the allegedly enormous income gap between rich and poor Americans.
The report, by the Center on Budget and Policy Priorities and the Economic Policy Institute, has received widespread media attention. But it contained numerous omissions and distortions that led it to greatly exaggerate the extent of income inequality in the United States. When these distortions are removed, the alleged income gap turns out to be more of a gully than a canyon.
The groups measure income inequality by dividing families into fifths, or quintiles, and then calculating the share of total income received by each. The bottom quintile, they report, receives only 4.5 percent of total income, while the top gets a whopping 45.4 percent giving the "haves" about $10 in income for every $1 received by the "have-nots."
But the study's conclusions are severely distorted by four factors. For one, the authors ignore taxes, which are disproportionately paid by those in higher-income quintiles. To accurately assess the income gap, the report should have subtracted the taxes individuals pay.
Second, the study fails to count many types of income, particularly government non-cash benefits such as Medicare, Medicaid, food stamps and public housing. Overall, government transfer payments the study did not count add up to about $580 billion per year, or 8 percent of total U.S. income, most of which flows to those in the lowest quintiles. Omitting this income from the report tilted the results even further in favor of the "class warfare" view.
Third, the "quintiles" do not contain equal numbers of people. While each quintile does contain one-fifth the number of U.S. families, the families at the bottom are smaller, mainly single-parent homes, many with little or no earnings. By contrast, the top quintile is comprised almost exclusively of larger married-couple families, nearly all of which have two or more earners.
Fourth, for reasons the authors never explain, the report oddly excludes all single-person households from its analysis.
Correcting these deficiencies has a huge effect on the much-hyped income gap. Instead of receiving only 4.5 percent of total income, the bottom quintile turns out to be receiving 9.4 percent. The same corrections reduce the share of income in the top quintile from 45.4 percent to 39.7 percent. The top quintile is not earning $10 for every $1 received by the bottom fifth. Once taxes, welfare and other government transfers are counted, the ratio drops to $6.88-to-$1. Including single-person households and correcting the quintiles so each contains one-fifth of the population drops the ratio to $4.23-to-$1.
What's more, the remaining income differences are in large part the result of the fact that working-age adults in the top quintile work about twice as much as their counterparts in the bottom quintile. If they worked the same amount, the ratio falls still further to $3.18-to-$1.
There are other differences in behavior and ability that affect income. People with high incomes tend to be married, have high levels of skill and productivity, and provide higher levels of savings and investment that sustain the overall prosperity of the economy. Those in the lowest income quintile tend to be unmarried, have lower levels of skill and productivity, and save less.
In addition, class warfare advocates should keep in mind that the quintiles are not immutable social castes. Most people do not remain in a single income quintile throughout their lives. Instead, they move into higher income brackets as their earnings rise with age or when they marry. Of particular importance are the growing numbers of single-parent families in the bottom quintile, a direct result of the alarming fact that 1 out of every 3 American children is now born out of wedlock. Indeed, at least half of the rise in income inequality in recent decades can be attributed to the growth in illegitimacy and single parenthood, according to a recent Urban Institute study.
Those who are truly concerned with the well-being of lower-income Americans should focus their efforts not on raising taxes on the most productive segments of society (as CBPP and EPI would wish), but on fostering marriage and raising work rates among the poor. In the meantime, they can at least stop issuing reports that illustrate the widening gap between fact and fiction afflicting proponents of class warfare.

Robert Rector is a senior research fellow and Rea Hederman is a policy analyst with The Heritage Foundation.



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