Charles W. Calomiris reviews The Myth of American Inequality by Phil Gramm, Robert Ekelund and John Early

See Believe Your Eyes, Not the Statistics: Official government measures greatly exaggerate income inequality by ignoring taxation and noncash sources of income.. Excerpts:

"Has the average standard of living grown substantially since the 1960s? Has inequality shrunk over that period? Did post-1960 redistributive policies reduce the percentage of families living in poverty?"

"Average living standards have improved dramatically. Real income of the bottom quintile, the authors write, grew more than 681% from 1967 to 2017. The percentage of people living in poverty fell from 32% in 1947 to 15% in 1967 to only 1.1% in 2017. Opportunities created by economic growth, and government-sponsored social programs funded by that growth, produced broadly shared prosperity: 94% of households in 2017 would have been at least as well off as the top quintile in 1967. Bottom-quintile households enjoy the same living standards as middle-quintile households, and on a per capita basis the bottom quintile has a 3% higher income. Top-quintile households receive income equal to roughly four times the bottom (and only 2.2 times the lowest on a per capita basis), not the 16.7 proportion popularly reported. 

What explains the disconnect between reality and belief? Government statistical reports exclude “noncash” sources of income, which excludes most transfers from social programs. Taxes (paid disproportionately by high earners) are also ignored in official calculations. Furthermore, even the government’s “cash” income numbers are reported in a way that understates improvements in real (inflation-adjusted) income over time because government inflation measures fail to use the appropriate chained price indexes or take account of new products and services.  

Increased earned-income inequality is the natural consequence of redistributive policies: if one can enjoy median household consumption without earning any income, the incentive to work is substantially diminished. This largely explains the growing distance between earned and total income for poor households (transfers to those households have gone up dramatically). Ironically, it is the very success of redistribution in reducing poverty and inequality that has led mismeasurement to create the false perception of increasing inequality. 

The equality of consumption between the bottom quintile (in which only 36% of prime-age persons work) and the middle quintile (in which 92% of prime-age persons work) is a striking finding."

"What makes this book an invaluable new resource for public policy and economic education is its focus on how the experiences of Americans of different living standards evolved over time and how earned income and consumption diverged for the poorest households. It traces improvements in the living standards of the poor to transfer programs, shows how taxation of the rich has flattened the distribution of consumption across households, and documents how measurement errors have distorted general beliefs about economic inequality."

"it measures not only differences in consumption by households across quintiles, but also the more meaningful per capita consumption across quintiles, and adjusts those per capita calculations to capture consumption synergies within households using standard methods."