Thomas Sowell On ‘Income Confusion’

aviSowellThe following are excerpts from two articles by Thomas Sowell from 2007. While the statistics are somewhat dated, the underlying analytical framework remains an important antidote to Leftist/MSM claptrap on the subject. Click on the links to read the articles in their entirety.

“Income Confusion”:

People in the bottom fifth of income-tax filers in 1996 had their incomes increase by 91 percent by 2005.The top one percent — “the rich” who are supposed to be monopolizing the money, according to the left — saw their incomes decline by a whopping 26 percent.

Meanwhile, the average taxpayers’ real income increased by 24 percent between 1996 and 2005…

[M]ost Americans do not stay in the same income brackets throughout their lives. Millions of people move from one bracket to another in just a few years.What that means statistically is that comparing the top income bracket with the bottom income bracket over a period of years tells you nothing about what is happening to the actual flesh-and-blood human beings who are moving between brackets during those years.

That is why the IRS data, which are for people 25 years old and older, and which follow the same individuals over time, find those in the bottom 20 percent of income-tax filers almost doubling their income in a decade. That is why they are no longer in the same bracket.

That is also why the share of income going to the bottom 20 percent bracket can be going down, as the Census Bureau data show, while the income going to the people who began the decade in that bracket is going up by large amounts…

Following trends among income brackets over the years creates the illusion of following people over time. But the only way to follow people is to follow people.

Another wild card in income statistics is that many such statistics are about households or families — whose sizes vary over time, vary between one racial or ethnic group and another, and vary between one income bracket and another.

That is why household or family income can remain virtually unchanged for decades while per capita income is going up by very large amounts. The number of people per household and per family is declining.

“Income Confusion, Part II”:

Income…is not the same as earnings, and neither is the same as the economic resources on which people’s standard of living is based…

Most of the income received by people 65 years old and up is not counted statistically as earnings. Only 24 percent of their incomes are earnings. Most of their incomes are from pensions or other sources known as “unearned income,” such as returns on investments.It should hardly be surprising that people who have been around a long time would have accumulated more money in the bank and maybe have a little nest egg in a mutual fund, each of which provides a stream of income during their retirement years, even if that income does not get counted as earnings.

Despite a drumbeat of political rhetoric depicting the elderly as being in dire economic conditions, the actual incomes of the elderly are more than four times what their earnings statistics might suggest — or what politicians can claim, citing those statistics…

Although income is often confused with wealth, as when people currently in high income brackets are referred to as “rich,” the elderly average lower income than middle-aged people, but more wealth…

The elderly are not the only people whose standard of living is grossly understated by those who cite statistics on earnings or income.

Those statistics do not include income received by low-income people as transfer payments from the government, such as welfare checks, much less various in-kind transfers, such as subsidized housing and subsidized medical care.

As of 2001, about 78 percent of the economic resources used by people in the bottom 20 percent of income recipients were in the form of either cash transfers or in-kind transfers.

To judge the standard of living of low-income people by income statistics is to leave out more than three-quarters of the economic resources used by them.

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