Spending inequality is far smaller than wealth inequality

See We’ve Been Measuring Inequality Wrong By Alan Auerbach and Laurence J. Kotlikoff in the New Republic. Excerpts:

"Our study focuses on lifetime spending inequality because economic well being depends not just on what we spend this minute, hour, week or even year. It depends on what we can expect to spend through the rest of our lives.

Measuring lifetime spending inequality for a representative sample of U.S. households was a massive, multi-year undertaking, which may explain why ours is the first such study."

"So what did we learn?

First, spending inequality—what we should really care about—is far smaller than wealth inequality. This is true no matter the age cohort you consider.

Take 40-49 year-olds. Those in the top 1 percent of our resource distribution have 18.9 of net wealth but account for only 9.2 percent of the spending. In contrast, the 20 percent at the bottom (the lowest quintile) have only 2.1 percent of all wealth but 6.9 percent of total spending. This means that the poorest are able to spend far more than their wealth would imply—though still miles away from the 20 percent they would spend were spending fully equalized."

"The fact that spending inequality is dramatically smaller than wealth inequality results from our highly progressive fiscal system, as well as the fact that labor income is distributed more equally than wealth.

The top 1 percent of 40-49 year-olds face a net tax, on average, of 45 percent. This means that the present value of their spending is reduced by the fiscal system to 55 percent of the present value of their resources. So someone in that age group who has resources with a present value of $25.5 million can spend $14 million of it after fiscal policy.

For the bottom 20 percent, the average net tax rate is negative 34.2 percent. In other words, they get to spend 34.2 percent more than they have thanks to government policy (they get to spend, on average, $552,000 over their lifetimes, which exceeds their $411,000 in average lifetime resources). The table below illustrates this for all quintiles.

Source: Federal Reserve 2013 Survey of Consumer Finances, Author Analysis

 To be clear, spending power remains extremely unequal.

Our point is that the fiscal system, taken as a whole, does materially reduce inequality, not in what people own or earn, but in what they get to spend.

This limits the scope to further equalize spending power by taxing the top 1 percent at a much higher rate. Indeed, among 40-49 year-olds, confiscating all the remaining spending power of the top 1 percent (with a 100 percent tax rate) and giving it to the poorest 20 percent would leave the latter group with 16.1 of total spending power, which is still less than 20 percent. And this hypothetical calculation assumes the jobs and incomes of those workers aren’t adversely affected by such a policy, which they most certainly would be."