The Myth of the 1%

By Michael R. Strain of AEI.

"The skewing of income toward the top 1% of earners has become a central issue in American politics, with both Republicans and Democrats proposing higher taxes on the rich. But new research finds that it may not be true, suggesting that policymakers would do better to focus more on helping the working class.

WASHINGTON, DC – For decades, the share of national income held by the top 1% in the United States has soared. Income inequality, which former President Barack Obama declared “the defining challenge of our time,” has become a major issue in American politics, with both Republicans and Democrats proposing higher taxes on the rich. The idea, peddled by nationalists and progressives, that the economic system is rigged against ordinary workers and households has also fanned the flames of populism. Some even argue that economic inequality threatens democracy.

And yet, the belief that income inequality has risen sharply may be wrong. New research by Gerald Auten of the US Treasury Department and David Splinter of the congressional Joint Committee on Taxation finds that the after-tax income share of the top 1% has barely changed since 1962. This stands in stark contrast to the work of Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, which has shaped policy and political debate in recent years: the trio conclude that the income share of the top 1% increased by roughly 55% over the same period.

Rather than answer the question of who is right (although I believe that Auten and Splinter are closer to the truth), it is more useful to consider whether the top 1% should be our focus. Seen from a broader perspective, the debate over income equality does little for those who need help the most.

The discussion has mostly centered on how much of the economic pie each group gets. But the size of the pie is not fixed. Since 1962, real economic output in the US has increased by 499%, leading to significant improvements in living standards and human welfare. The percentage of Americans in poverty has decreased substantially, new medicines and therapies have greatly enhanced people’s quality of life, and more women have entered the workforce.

This considerable improvement in Americans’ well-being is more striking than the share of income accruing to the country’s highest earners. Compare a median-income household to one in the top 1%. Each has access to high-quality medical care and pharmaceuticals, each can take nice vacations, each can eat in the same restaurants, read the same books, and watch the same television shows, and each has warm clothes and a comfortable home.

To be sure, there are disparities – the wealthier family has better health care, flies first class to the Caribbean on holiday, occasionally eats at Michelin-starred restaurants, and has a bigger house. But this does not negate that inequality in quality of life has shrunk dramatically in recent decades. The quality-of-life gap between a median-income household and one in the top 1% a century ago, and even a century before that, was much larger.

Moreover, the economic and philosophical underpinnings of this obsession with the top 1% are far from sound. In a market economy, income is earned, not distributed. And in a democracy, inequality is acceptable if it is driven by productivity differences – and the best evidence shows a strong link between pay and productivity in the US.

Ultimately, the income-inequality debate is normative: How much “should” the top earners “receive” from society? It would be better to start from the premise that the wealthiest have earned their income, and to ask how much of these earnings should be taken by the government. According to the nonpartisan Congressional Budget Office (CBO), the top 1% earned 17.6% of all market income and paid 24.7% of all federal taxes in 2019, suggesting that they are already on the hook for quite a bit.

Ironically, concern about the income gap exploded during a period when, as I show in my book The American Dream Is Not Dead (But Populism Could Kill It), measured inequality was stagnant or declining. Using data from the CBO, I found that income inequality across all households – after accounting for taxes and government transfers and estimated with a Gini coefficient – increased by 29% between 1979 and 2007, but then fell by more than 5% between 2007 and 2019.

To understand this trend, one must focus on the bottom 99%. Even though inequality was rising in the 1990s, average wages were also increasing; Americans were not concerned about whether they were growing faster for some groups than for others. But after the 2008 financial crisis, average wages plummeted. In fact, they fell so sharply for the bottom half of workers that it took until 2014 for the median real wage to recover its 2007 level. This prolonged period of wage stagnation fomented anger and a sense of injustice – of a “rigged” economic game – which gave rise to populism.

The lesson is clear: people care about how they themselves are doing, and not about a group of people with whom they seldom interact. People are not as dripping with envy as the debate over inequality would have you think.

Anyone concerned about the health of American democracy should be more worried about wage growth for the bottom half of workers than the income gap. If upward mobility is the goal, then we must stop treating economic success as if it were a problem rather than something worth celebrating. Policymakers should focus on providing the poor and the working class with on-ramps to economic opportunity.

The 1% don’t deserve nearly as much attention as they receive. It would be better to concentrate on increasing the wages and incomes of those at the bottom, who are most in need of a helping hand."