The inequality illusion

Click here to read this article by Aparna Mathur of AEI.Excerpts:

"we worked with the RECS data as well. This survey has questions on household use of appliances such as microwaves, dishwashers, computers, printers and other data. What we find is that the access of low-income Americans – those earning less than $20,000 in real 2009 dollars – to these devices that are part of the “good life” has increased. The percentage of low-income households with a computer rose to 47.7% from 19.8% in 2001. The percentage of low-income homes with six or more rooms (excluding bathrooms) rose to 30% from 21.9% over the same period.  Similar increases can be documented for appliances like air-conditioners, dishwashers, microwaves, cell phones and other household items.

In general, we find that people at all income levels now have access to many more material possessions than they did in the 1980s. Moreover, there has been a narrowing of the gap between high and low income classes in terms of ownership of these items. It is hard to argue against the improvement in the standard of living that has accompanied these trends.

Hence, the standard narrative that rising income inequality has somehow hurt the middle and lower income classes is not supported by data. Policies aimed at redistributing incomes from the top to the lower income classes have certainly been responsible for part of this trend. However, we would caution against using this argument for raising marginal tax rates at the top to levels seen in the 1970s. In another co-authored piece , my colleagues and I argue that the Diamond and Saez solution to inequality—a marginal tax rate of 73 percent —is based on unrealistic assumptions relating to how individuals would respond to high tax rates. Their modeling of the optimal rate assumes a “more equality is better” social welfare function and assigns no social value to the marginal dollar of consumption for the rich. Most importantly, it ignores the long-run behavioral responses and consequences of having marginal tax rates that are over 50 percent. In the article, we show that while these assumptions work well in theoretical models that are aimed at catering to an audience of professional economists, these should not be used as the basis of real world public policy formulation."