PDF Summary:The Myth of American Inequality, by Phil Gramm, Robert Ekelund, and John Early

The statistics reported by the U.S. government are inadequate in providing an accurate representation of income inequality, poverty rates, and economic well-being in America. In The Myth of American Inequality, authors Phil Gramm, Robert Ekelund, and John Early argue that existing government metrics fail to account for a substantial portion of income derived from government transfers, overlook taxes paid by households, and rely on inflation measurements that overstate the actual rise in living costs.

The authors contend that after factoring in these deficiencies, the perceived income gap narrows, poverty rates plummet, and economic progress becomes more evident across different income levels. They also explore contributors to the widening disparity in labor-based income, including declining workforce participation among the lowest earners and the growing significance of educational attainment.

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The substantial growth in government transfer payments has diminished the motivation for employment.

The authors argue that a multitude of government programs initiated during the War on Poverty unintentionally diminished the work incentive for low-income families.

An increasing number of individuals found the idea of a life supported by expanding social benefits, which improved the living standards for those out of the workforce, more appealing. The authors contend that such a trend impedes economic growth and exacerbates income inequality, which in turn undermines individual liberty. They point out that this dynamic is clearly reflected in the fact that in the bottom quintile of households, government transfer payments now constitute about 90% of all pre-tax income, whereas they were only about 75% before the War on Poverty.

The growing significance of pursuing advanced educational qualifications.

The authors recognize that in the United States, education has frequently been a ladder for social and economic advancement, and they observe that the increased incentives tied to educational achievements have contributed to the widening of income gaps related to work. As the economy has become more knowledge-based, the demand for highly skilled workers has driven up the earnings premium for those with college degrees and other educational credentials.

The income disparity between college graduates and individuals whose education concluded with a high school diploma has widened significantly, now at 96% compared to the 56% difference noted in 1967.

The authors highlight the increasing importance of educational levels by analyzing the differences in wages among workers with different educational backgrounds. In 1967, the average earnings of individuals possessing a college degree surpassed those with only a high school diploma by 55.9 percent. In 2017, individuals who had attained a college degree were receiving nearly double the earnings compared to those whose education had concluded with a high school diploma, resulting in a 96% increase.

The surge in earnings among individuals with advanced education has concurrently increased the differences in income levels while enhancing opportunities for advancement. In 2017, those who graduated from high school earned more in real terms per hour than individuals who had completed college fifty years earlier, a trend attributable to productivity improvements, even as the income disparity linked to levels of education has grown.

Households that have achieved higher levels of education tend to earn more income.

The authors observe that while educational attainment has risen among various income brackets, the pace of such advancement has not been uniform. Parents from higher income brackets have intensified their labor contributions, thereby facilitating greater investments in their offspring's educational pursuits, resulting in accelerated educational accomplishments among these demographics. Households with higher incomes are more frequently composed of individuals with advanced degrees, which has led to an expansion in the disparity of earning potential, in contrast to households with lower incomes where college graduates are much rarer.

The authors contend that the association between advanced education and elevated earnings should not be viewed as a societal defect, but rather as an inherent aspect of the current state of affairs. Children from families with lower incomes have not advanced as quickly in obtaining higher education, resulting in a higher proportion of adults in the least affluent homes lacking a high school diploma.

The number of households with both partners earning substantial incomes has risen.

The authors point out another factor contributing to the growing income gap from employment in the last fifty years: the increase in households where both partners work, especially among those who have both earned college degrees, often referred to as "super households." The rise in household earnings is largely due to a greater number of women securing jobs and achieving higher levels of education, which results in couples with similar high-earning capabilities joining together.

Since 1967, there has been a threefold rise in the prevalence of households where both partners have earned a college degree.

The increase in women obtaining college degrees has led to a notable growth in the number of households where both partners possess a college education. Over the last fifty years, that figure has increased fivefold. A significant portion of the highest income bracket is composed of households where typically two members have attained higher education and are engaged in professions with substantial earnings, representing approximately 25% of this echelon. The increasing gap in household earnings has been markedly shaped by the improved ability to generate income, which is primarily due to the rising participation of women in the labor market and their advancements in educational and career achievements.

The concentration of potential earnings amplifies the differences in wealth.

The authors emphasize that when a household includes two individuals with high earnings, it reflects patterns of personal success and the formation of family units, rather than suggesting any economic deficiencies. Greater levels of education have further enabled individuals to choose their partners with greater independence by providing more financial independence to each person. Individuals possessing the most advanced educational qualifications are increasingly pairing up with those who have similar academic achievements. The trend of individuals with similar views forming relationships has amplified the disparity in family incomes, in part due to a heightened emphasis on acquiring education.

Other Perspectives

• The reduction in labor input among lower-income adults may not solely be due to government assistance programs; other factors such as automation, globalization, and shifts in the economy towards sectors that require higher skills could also play significant roles.
• The argument that government assistance diminishes the incentive to work may not account for the complexity of poverty and the barriers to employment that individuals face, such as lack of access to affordable childcare, education, or health care.
• The widening income disparity between college graduates and high school diploma holders could be influenced by factors beyond the value of the degrees themselves, such as networking opportunities, social capital, and the rising cost of higher education which may limit access for lower-income individuals.
• Higher education is not always a guarantee of higher income, as underemployment and student debt can significantly impact the financial well-being of college graduates.
• The concept of "super households" may overlook the systemic issues that lead to income disparity, such as tax policies that favor the wealthy, lack of support for single-parent households, and the undervaluing of work typically done by women.
• The emphasis on individual choice in partner selection based on educational attainment may not fully consider societal pressures and the role of socioeconomic status in shaping personal relationships and family structures.
• The narrative that increased education leads to higher earnings does not address the quality of jobs available to workers without a college degree and the need for investment in vocational training and other forms of education that are directly linked to employment opportunities.

The fiscal duties and taxation responsibilities borne by the United States' most affluent citizens.

The authors address multiple misconceptions regarding the ultra-wealthy, particularly the incorrect assumption that their financial contributions are excessive and that they do not contribute a fair share of taxes. They argue that these misconceptions stem from an incorrect understanding of how high-income families accumulate their wealth and the proportion of their income they pay in taxes.

The most affluent people typically accumulate their wealth by being productive.

Gramm and his colleagues argue that affluent Americans primarily accumulate their wealth through active personal endeavors, as opposed to receiving it through inheritance or passive investment income. Their wealth is amassed through participation in entrepreneurial ventures that drive innovation and result in the creation of businesses providing valuable goods and services to the community.

The majority of the income for the top 1% comes from their entrepreneurial activities, along with their earned wages and salaries, instead of investment returns.

The authors examine data sourced from the tax authority to explore the methods by which high-income earners amass their wealth, uncovering that a significant portion is derived from their work. Households in the top 1% primarily derive their income from active employment and direct involvement in business operations, as opposed to investment returns. The assertion holds true even when focusing on the highest-earning 0.1% of individuals. The capacity to generate income is inherently connected to an individual's engagement in the economy, despite the considerable income gap between those with higher earnings and those at the lower end who are not employed.

A mere 5% of those within the highest 1% income bracket could be characterized as relying predominantly on their wealth for their livelihood.

The authors' analysis of the 2005 IRS tax records showed that only 4.3% of the top 1% of earners were either unemployed or deceased. This group includes both individuals who died during the fiscal year and those who have stopped working and now depend on their accumulated wealth for sustenance. The category known as "Entrepreneurs, not elsewhere classified" included individuals who were directly involved in growing and managing their own businesses. The authors ascertain that only a small portion, not surpassing 5 percent, of individuals with substantial income belong to the privileged group that amasses wealth without directly working for it.

Households with the highest earnings bear a substantially greater tax burden.

The authors argue that, despite the common perception, affluent Americans actually shoulder a disproportionately greater share of the tax burden compared to households earning less. The book illustrates that households with higher earnings contribute a more substantial portion of their earnings to taxes and also constitute a greater fraction of the overall tax revenue.

The top 1% of earners pay 45.1% of the total income taxes, despite earning just 33.5% of the total income.

The authors analyze fiscal data to demonstrate that individuals in the highest 1% of income brackets contribute a significantly greater portion of their earnings in taxes compared to those earning less. The top 1% of households are responsible for paying 45.1% of the nation's income-related taxes, despite earning just 33.5% of the nation's total income. The authors argue that focusing exclusively on the tax rates imposed on individuals with significant incomes presents a skewed perspective on the equity of taxation. The book overlooks the full effect of income taxes on individuals, which includes both the proportion of their income that is taxed and their share of the total tax revenue generated.

The top 10% of earners pay a larger share of the total tax revenue than their share of income indicates, while the other 90% pay a lesser share compared to their income.

The authors demonstrate that while individuals with higher incomes bear a larger share of the tax burden relative to their income, those with modest incomes contribute a lesser share in proportion to their earnings. In the United States, the top 10% of earners contribute 7.6% of the GDP through income taxes, while the remaining 90% contribute slightly more, at 9.2% of the GDP.

The authors acknowledge that, in contrast to numerous other advanced countries, the United States puts less focus on taxes that are levied on goods and services consumed, unlike the value-added tax. However, they underscore the point that taxes on consumption disproportionately impact families with lower and middle incomes, as they are regressive.

Other Perspectives

• The concentration of wealth among the affluent may result from a combination of factors, including favorable tax policies, inheritance, and capital gains, not solely from productive entrepreneurial activities.
• Income from wages and entrepreneurial activities may be complemented significantly by investment returns, especially given the compounding nature of wealth.
• The small percentage of the top 1% not relying on active income does not account for the proportion of wealth that is inherited, which could be substantial.
• The tax burden on the highest earners must be considered in the context of the overall progressive tax system, which is designed to tax individuals based on their ability to pay.
• The figure that the top 1% pays 45.1% of total income taxes may not account for other forms of taxation that affect overall tax incidence, such as payroll, corporate, and estate taxes.
• The share of taxes paid by the top 10% should be evaluated against the backdrop of wealth inequality and the relative capacity of different income groups to contribute to tax revenues.
• Consumption taxes, while regressive, are only one component of a tax system that includes progressive elements such as income and estate taxes, which may offset the regressive nature of consumption taxes.
• The argument that the ultra-wealthy pay a fair share may not fully consider the effectiveness of tax avoidance strategies that can disproportionately benefit those with high incomes.

To accurately represent economic progress and mobility, it is essential to overhaul the methods used in assembling official data, which plays a pivotal role in shaping policy.

The authors argue that the shortcomings identified in this book concerning official measures related to income, poverty, and welfare have a substantial impact on public policy debates. Overstating the gaps in wealth while downplaying the progress in finances distorts the understanding of the American economic landscape, thereby hindering the ability of policymakers to develop informed strategies. The authors propose changes to correct these statistical errors and recommend policy modifications aimed at removing government barriers to employment and improving educational opportunities.

It is essential for statistical agencies to be mandated to compute income by including every form of transfer payment, deducting taxes, and employing the most accurate measures of inflation.

The authors present a strong argument for the immediate and comprehensive reform of the mechanisms used to collect and distribute information regarding the country's economic health. They argue that such changes are essential to enable meaningful conversations on disparities in wealth, the prevalence of poverty, and the general standard of living, all of which are critical for crafting successful socio-economic policies.

Debates surrounding both communal and individual wealth are profoundly influenced by the current analytical approaches that consider the disparate allocation of income and the limited availability of resources.

The standard method employed by the U.S. government, which fails to account for various government transfers as income for recipients and does not consider taxes paid in determining true disposable income, along with the application of price indices that overstate inflation, leads to a skewed portrayal that does not accurately depict the true state of the U.S. economy and perpetuates a misleading view of social conditions. The distorted view of economic conditions hampers the ability of both the public and policymakers in the United States to create successful plans to tackle the uneven distribution of wealth and earnings.

Enhanced metrics are essential to inform robust economic and societal strategy.

The authors propose actionable modifications that would improve the accuracy of official data, thereby providing a clearer perspective on income disparities, the extent of poverty, and the general state of wealth. These reforms include:

1. Laws were enacted to ensure that income calculations incorporated the addition of transfer payments. The authors recommend the implementation of legislation requiring that any form of governmental assistance, including food stamps and Medicare, be factored into the income calculations of individuals by the Census Bureau and similar agencies.

2. An individual's income is subject to compulsory deductions in the form of taxes. The authors suggest the implementation of legislation requiring the Census Bureau to deduct taxes when evaluating income differences, providing a more accurate representation of the financial resources available to households.

3. Employing more accurate measures of inflation: The authors recommend utilizing both the Personal Consumption Expenditure Price Index and the Chained Consumer Price Index for All Urban Consumers to enhance the precision of official statistical adjustments, which would result in a truer representation of inflation and prevent overstated estimates. The authors argue for the swift integration of improved measurements that truly capture the value of advanced and complex goods into price indicators.

It is essential to remove governmental obstacles that impede employment prospects for families with modest earnings.

The authors highlight how the current welfare system has inadvertently discouraged work and trapped numerous Americans in a dependency loop. They call for reforms that encourage independence and create motivations to enhance workforce engagement, rather than creating obstacles to employment.

The introduction of significant welfare payments that are not contingent upon employment has led to a noticeable reduction in the active workforce.

The authors argue that a consequence not initially anticipated emerged due to the swift increase in social welfare benefits following the War on Poverty. The fifth chapter details how substantial aid provided to low-income families, which is not contingent upon employment, has resulted in a significant reduction in labor market participation among adults in their prime working years. The authors demonstrate that the widening gap in income levels throughout the United States since World War II's conclusion is mainly attributable to a decline in the number of people participating in the workforce. The authors emphasize that when people receiving assistance are not given opportunities to develop their abilities and contribute to economic expansion, it hampers not only their own progress but also the nation's financial health.

Securing jobs is crucial to pave the way for advancement and equitable chances for all individuals.

The authors recommend reintroducing the requirement that individuals must be working or in the process of looking for work to be eligible for welfare support, with the goal of boosting labor force participation. They contend that by mandating work requirements, individuals will be propelled toward self-sufficiency, aiding them in gaining valuable expertise and practical knowledge, thereby reducing their dependence on governmental assistance. The authors credit the advancement to the 1996 overhaul of the welfare system, which restructured continuous assistance into finite, employment-contingent support. The changes resulted in a marked decline in dependency on welfare, a decrease in the incidence of poverty, and an increase in employment among benefit recipients.

The authors acknowledge the importance of supporting those with disabilities but argue that being actively engaged in employment should be a condition for able-bodied persons to qualify for such aid. They contend that such a transformation would not only stimulate economic expansion but also instill a sense of worth and meaning in those who receive social assistance.

A thorough revamping of the educational system is necessary to improve its caliber and broaden the range of choices available to learners.

The authors examine the shortcomings of the public education system, particularly its failure to adequately prepare many students from low-income families for success in their careers or further education. They advocate for substantial modifications in the education system that prioritize strict standards, accountability, and the freedom for learners and their parents to choose.

Inadequate urban public schooling significantly hinders economic advancement.

The book emphasizes the deficiencies in America's public education system, particularly for those who lack the economic resources to seek different educational pathways. The book utilizes data from the National Assessment of Educational Progress (NAEP) to demonstrate that only a minority of public high school seniors possess the necessary math and reading skills for lucrative jobs or academic success, a situation that is especially severe for African American and Latino students.

The authors argue that the quality of education in urban areas, which primarily cater to less affluent families, poses a substantial barrier to progress in society and the economy, thereby severely limiting opportunities for people to improve their social standing and exacerbating inequality. The authors argue that the underwhelming outcomes of numerous public schools are due to persistent practices, the inertia of bureaucracy, and the sway of entrenched entities that benefit from maintaining the current system, particularly teachers' unions.

Allowing families to choose schools for their children not only improves academic outcomes but is also more economical.

The authors suggest reforms that enhance the ability of families to choose educational environments and methods for their children, thus supporting the independence of parents in making educational choices. They point to substantial evidence demonstrating that charter schools and publicly sponsored vouchers for private schools often deliver far better outcomes than traditional public schools, particularly for minority and low-income students, but, in addition, they are less expensive for taxpayers.

The authors argue that the freedom of families and learners to choose their schools creates a competitive atmosphere that drives educational institutions to improve the quality of education and focus on the needs of families rather than the desires of school administrators and unions. The authors recommend directing resources to allow parents to choose educational institutions that meet the needs of their offspring and match their own aspirations. The authors argue that this approach would markedly improve educational quality for all children throughout the United States, thus providing real opportunities for upward social mobility to many who are presently lacking these opportunities because of a failing educational system.

Other Perspectives

• Including all forms of transfer payments in income calculations might not accurately reflect an individual's long-term economic status, as some benefits are temporary or fluctuating.
• Deducting taxes to evaluate income differences could be complex due to the variability in tax codes and the impact of deductions and credits.
• The Personal Consumption Expenditure Price Index and the Chained Consumer Price Index may not be perfect measures of inflation, as they too have limitations and may not capture all consumers' experiences.
• Removing governmental obstacles to employment could ignore the structural issues that contribute to unemployment, such as education disparities, discrimination, and economic downturns.
• Work requirements for welfare could disproportionately affect those who are unable to find work due to systemic issues or personal circumstances, such as health problems or caregiving responsibilities.
• The assertion that welfare payments without work requirements reduce workforce participation may not consider other factors influencing employment decisions, such as childcare availability, job market conditions, and education opportunities.
• Overhauling the education system and introducing school choice could lead to unintended consequences, such as increased segregation, the undermining of public schools, and the lack of accountability for private institutions.
• School choice programs might not be accessible to all families equally, potentially exacerbating inequalities if not carefully designed and implemented.
• The focus on competitive atmospheres in education may overlook the importance of collaboration and community in learning environments.
• The argument that charter schools and vouchers are more economical and effective could be contested by studies showing mixed results regarding their impact on student outcomes.