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Commentary

Does Unequal Mean Unfair?


     
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If you and I have different incomes, is that unfair? Strange as it may seem, the chattering class is full of people who think equality and fairness are the same thing. Conversely, they assume that inequality of income is unfairness, per se.

In a study for the National Center for Policy Analysis (NCPA), economist David Henderson demolishes this notion. Most inequality, Henderson shows, is the result of choices people make—including the choice to work—not the result of unfairness or accidental events over which people have no control.

For the moment, let’s forget about the top 1%, or the super-rich, and focus on the vast majority of people. Henderson concludes that inequality has increased over time—with the top fifth of the income distribution now receiving about 12 times as much income as the bottom fifth. But that’s mainly because the top fifth spends vastly more time in the labor market earning a living. In fact, if you divide income by the number of weeks of work, the difference between the top and bottom fifth is only 2 to 1.

Granted, we are living in tough times with millions of people involuntarily out of work. But the numbers I just cited come from the period before the Great Recession, when we had virtual full employment. In other words the 12 to 1 difference in income exists largely because some people choose to work and others do not to.

In 2006, for example:

Most families in the top fifth of the income distribution had two full-time workers, while most families in the bottom fifth had no full time worker.

Specifically, in the top fifth there were 2.2 workers per household, on the average; in the bottom fifth, there were 0.7.

Less than one-third of families in the bottom fifth had a head of household working full time; in the top fifth, three-fourths of families did.

Age also matters in a way that makes the raw numbers misleading. It turns out that adults in the bottom fifth tend to be either very young or very old. The very young are the ones starting out in life who have yet to learn the job skills that will produce a high income. The very old are the ones who are retired. By contrast, the people in the top fifth tend to be people in their peak earning years:

In the bottom fifth of the income distribution, only one-third of households are headed by someone age 35 to 54; whereas in the top quintile, more than half of household heads are in that age range.

The bottom group also has a much larger proportion of household heads older than 75 years of age—11.5 percent versus 2.3 percent for the top group.

The bottom also has more young heads of households ages 15 to 24—10 percent versus 1.1 percent for the top.

In another NCPA study, economist Andrew Rettenmaier discovered that there is enormous mobility in the U.S. economy—with people moving up and down the economic ladder over short periods of time. For example, within 10 years most people who start out in the bottom fifth have moved up, with almost 1 in 10 (8%) moving all the way to the top. The reverse movement is similar. Within 10 years, most of those who started in the top fifth have moved down, with more than 1 in 20 (6%) moving all the way to the bottom.

Last week I alerted readers to the fact that most rhetoric about income inequality is wrong. Virtually every major Republican tax bill in modern times has made the tax code more progressive—as the burden of taxation has consistently been shifted to higher income taxpayers. In fact the United States now has one of the most progressive tax systems of industrialized countries. Also, freer economies produce more equal incomes and they tend to confer their greatest rewards on those at the bottom.

But the more important point is that the entire obsession about unequal incomes is misplaced. As David Henderson explains:

The income distribution should be judged not by how equal it is, but by how people obtained what they have. Inequality due to government-granted privileges, in the form of subsidies, quotas and so forth, is arbitrary and unfair, while inequality due to income earned through work and investment is just.


John C. Goodman is a Senior Fellow at the Independent Institute. The Wall Street Journal and the National Journal, among other media, have called him the “Father of Health Savings Accounts.”

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