Good News and Bad News on Income Inequality

According to Emmanuel Saez, 2015 brought both good news and bad news on the issue of income inequality.

The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998, but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period.

For the gains achieved by the bottom 99 percent, Kevin Drum identifies the next question:

The remaining question is whether this increase is mostly confined to the top 10-20 percent, or if workers in the bottom half of the income distribution also made gains.

He answers by providing this chart.

The good news is that everyone is doing better. And yet, according to this data, income inequality continues to grow because the 1% are doing even better than the rest of us.

But there’s one thing to keep in mind about this data from Saez.

These statistics measure pre-tax cash market income excluding government transfers such as the disbursal of the earned income tax credit to low-income workers.

This is what Zachary Goldfarb described as “market inequality,” as opposed to “post-policy inequality.”

Much of the attention in the inequality debate has focused on market inequality, which is the income we receive before any government policy is taken into account. This type of inequality measures what the economy is doing on its own: what companies are paying workers in salary and benefits, the gains or losses of investors, etc.

Then there’s post-policy inequality, once you consider the effect of taxes and transfers such as Social Security payments and food stamps. This type of inequality measures what people actually experience: the income they have to spend at the end of the day on goods and services for themselves and their families.

A lot of what the government has done to combat income inequality, both in the past and more recently, has come in the form of post-policy solutions. That includes everything from the social safety net to Obamacare subsidies and a more progressive tax code (i.e., higher taxes on the wealthy, the earned income tax credit, etc.)

One could make the argument that, while it is helpful to have information on how market forces continue to increase income inequality, we need data on post-policy inequality in order to measure the impact of government policies on the issue. In other words, this report from Saez contains both good news and bad news…but not all the news.

Nancy LeTourneau

Nancy LeTourneau is a contributing writer for the Washington Monthly. Follow her on Twitter @Smartypants60 .