The Homa Files

Excerpted from WSJ: “New Evidence on Taxes and Income”, ARTHUR  LAFFER and STEPHEN MOORE, September 15, 2008

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The new Census Bureau data on income and poverty reveal that many of the economic trends in this country are a lot more favorable than America’s detractors seems to think.

In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families — mother and father in the home — rose to $78,000, an all-time high.

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Although incomes fell sharply in the U.S. after the dot-com bubble burst in 2000 (and still haven’t fully recovered), these latest statistics reflect a 25-year trend of upward economic mobility.

To be sure, there has been a massive amount of wealth created in America over the last 25 years. But tax rates were cut dramatically across the income spectrum, for rich and poor alike. The results?

When all sources of income are included — wages, salaries, realized capital gains, dividends, business income and government benefits — and taxes paid are deducted, households in the lowest income quintile saw a roughly 25% increase in their living standards from 1983 to 2005.  This fact alone refutes the notion that the poor are getting poorer. They are not.

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Income gains over the last 30 years have been systematically understated due to several factors. These include:

– Fall in people per household. The gains in household income undercount the actual gains per person, because the average number of people living in low-income households has been shrinking. On a per capita basis, the real income gain for low-income households was 44% from 1983 to 2005, about 22% from 1983 to 1992 and about 18% from 1992 to 2002. These are excellent numbers by any measure.

– Earned income tax credit effect. The Earned Income Tax Credit (EITC) is a government payment to low income people who work. Over time the EITC has multiplied the number of poor households that fill out tax forms each year and are thus counted in government income statistics. That’s because to be eligible to receive the refundable EITC, a tax return must be filed.

– We are now statistically counting more poorer families today than we used to. This is a major reason that median and poor household income gains appear to be a lot smaller than they have been in reality. Official tax return data show that in 1983, 19% of returns had zero tax liability; that percentage has climbed steadily, reaching 33% in 2005. (The Tax Policy Center estimates that in 2008 nearly 40% of filers will have no income tax liability.)

– Income mobility. In the U.S., people who had low incomes in 1983 didn’t necessarily have incomes as low a decade later. People in this country have long moved up over time, and this income mobility continues to be true. While some people do remain in the lowest income group, they are the exception.

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What is also striking about the data is that the poor today are, in general, not the same people who were poor even a few years ago.

For example, the new Census data find that only 3% of Americans are “chronically” poor, which the Census Bureau defines as being in poverty for three years or more. Many of the people in the bottom quintile of income earners in any one year are new entrants to the labor force or those who are leaving the labor force.

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America is still an opportunity society where talent and hard work can (almost always) overcome one’s position at birth or at any point in time. Perhaps the best piece of news in this regard is the reduction in gaps between earnings of men and women, and between blacks and whites over the last 25 years.

Census Bureau data of real income gains from 1980 to 2005 show the rise in incomes based on gender and race. White males have had the smallest gains in income (up 9%), while black females have had by far the largest increase in income (up 79%). White females were up 74% and black males were up 34%. Income gaps within groups are rising, but the gaps among groups are declining.

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The evidence is plain that all groups across the income distribution have made solid gains during the last generation.

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Full article:
http://online.wsj.com/article_print/SB122143692536934297.html

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This entry was posted on September 16, 2008 at 7:55 am and is filed under Economics, Government & Politics, Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.