Brookings: Topics - Income Distribution

How Much Do Americans Care About Income Inequality? Part II

Scott Winship — Wed, 15 May 2013 16:00:00 -0400

Recently in this space, I criticized an op-ed that claimed to resolve a paradox related to inequality and public policy. Ilyana Kuziemko and Stefanie Stantcheva argued that while Americans are "deeply troubled about the current level of income inequality," support for government policy to reduce it is low. Based on a series of randomized experiments they conducted with Emmanuel Saez and Michael Norton, Kuziemko and Stantcheva speculated that rising inequality has eroded trust in government, resolving the paradox.

In my previous essay, I argued that there is little evidence to indicate that Americans are particularly concerned about inequality, so their lack of interest in having the government intervene should be unsurprising. Here I want to draw attention to a problem with the conclusion of Kuziemko and her colleagues that providing people with information about inequality reduced trust in government.

In their experiment, some survey respondents were provided information about their ranking in the income distribution and about inequality levels. Receiving this information produced a decline in expressed levels of trust in government. Kuziemko and her colleagues conclude that,"emphasizing the severity of a social or economic problem appears to undercut respondents' willingness to trust the government to fix it-the existence of the problem could act as evidence of the government's limited capacity to improve outcomes more generally." But the information in their survey did not simply emphasize the severity of inequality, it exaggerated economic hardship.

Respondents randomly selected to receive information about inequality first input their "annual household income" and were told the share of "US households" that earn less than their own "household." But the information the survey gave respondents made them feel richer than they were. I typed into the survey form the 2011 median household income according to the Census Bureau-$50,054. The survey should have told me that "my" household was richer than 50 percent of American households-that's what the median is. Instead, I was told I was richer than 66 percent of households.

In fact, what the information provided by the survey told the subject was the percentage of tax returns that have less gross income than the household income she reported. Tax returns are not households. Two roommates living together, a cohabiting couple, a married couple filing separate returns-all of these constitute one household but two tax returns. More to the point, a sixteen-year-old burger-flipper or a fulltime college student with a work-study job are also distinct tax returns even if they live at home. Furthermore, gross income on tax returns (AGI with adjustments put back in) is not "household income" as most people think of it. For example, non-taxable public transfers-including most Social Security benefits and all welfare benefits-are excluded. So are the tax-favored employee benefits commonly deducted from paychecks, such as health insurance premiums, retirement plan contributions, and flexible spending accounts.

The result of these differences between the income of households and the gross income of tax returns is that the median for the former is quite a bit bigger than the median for the latter (and the same is true for other parts of the income distribution, such as the "richest ten percent" or the"poorest third"). The survey tool reports that $33,800 is the median "household income"-one-third less than the actual median.

The respondent, then, "learned" that she was richer than she was, and if she correctly thought that her standard of living was average before responding, she learned that it was better than average. More people were doing worse than her than she thought, and fewer people were doing better than her. The next step in the survey drove that home by inviting her to move a slider to see how "households" with different income levels rank compared with other households. This step reinforced that Americans were poorer than they actually were.

Different subjects were shown additional screens subsequently. However, everyone randomized to receive the information about inequality proceeded through the rest of the survey-with its questions about policy preferences and trust in government-having been given this overly-negative data about how Americans are doing economically. The subjects randomized to bypass the informational screens were not primed in this way. The design of this experiment does not allow us to assess whether getting accurate information about the distribution of household income reduces trust in government. Instead, trust in government may be eroded by getting anxiety-provoking (and inaccurate) information.

Interestingly, Kuziemko and her colleagues report results from a separate experiment they conducted indicating that among below-median households, being primed with negative information about the state of the economy reduces opposition to inequality and support for redistribution and for progressive approaches to deficit reduction. It may be that attempting to convince middle class Americans that economic insecurity is more pervasive than it is will prove counterproductive to those who wish to help the truly insecure.

I have argued elsewhere that conventional accounts on the left do, in fact, systematically overstate both the extent of economic insecurity and the strength of the evidence that income inequality is harmful. It would be a regrettable irony if an excessive and distorted focus on inequality turns out to be more harmful to struggling families than income inequality itself.

Authors

Scott Winship

Publication: Real Clear Markets

Image Source: © Carlo Allegri / Reuters

How Much Do Americans Care About Income Inequality?

Scott Winship — Tue, 30 Apr 2013 10:14:00 -0400

Since the financial crisis, income inequality has been a topic of obsession in many journalistic and advocacy quarters. There is some irony in this, because the crash brought about the first reversal of inequality between "the 99 percent" and richer Americans in years, and there was much less concern about the subject during the period in which inequality was rising steadily. A very visible group of academic, policy, and media elites is convinced that rising inequality is the problem of our time, and many of them struggle to understand why the issue has not inspired an outcry from the broad middle class and poor.

The head-scratching and excuse-making was recently put on display in an unintentionally revealing way in a recent op-ed attempting to explain Americans' views toward economic inequality. In it, the authors, Ilyana Kuziemko and Stefanie Stantcheva, laid out what they believe to be a paradox: Americans care about inequality but do not want government to address it. Kuziemko and Stantcheva go on to describe research they have conducted with famed inequality scholars Emmanuel Saez and Michael Norton that they believe explains the "complicated" views of Americans. Their conclusion: rising inequality may have weakened faith in government.

However, a fair read of polling on inequality refutes the idea that Americans are self-contradictory. There is little evidence that Americans are particularly bothered by inequality; therefore, it is unsurprising that they do not want government to reduce it. On the other hand, there is ample evidence that Kuziemko, Stantcheva, Saez, and Norton believe Americans should be more bothered by inequality. But you can't always get what you want.

Kuziemko and Stantcheva (K & S) cite a December 2011 Pew Research Center poll finding that 66 percent of Americans agreed there was strong conflict between rich and poor Americans. This result is regularly interpreted as indicating the public is concerned about inequality but indicates no such thing. The question measures respondents' sense of the existence of conflict, not whether that conflict is worrisome. You may recall that in late 2011, Occupy Wall St. had finally made inroads with the general population, as the economy sputtered. Respondents to that poll accurately perceived that there was more conflict than there had been even a few months earlier. Indeed, upper-income respondents were no less likely than poor respondents to agree there was strong conflict.

The increase in perceived conflict the poll found between 2009 and 2011 looks worrisome, but 2009 was a historical low point. The level of perceived conflict at the end of 2011 was no higher than in 1992, and it dropped to 58 percent in late 2012. That level was the same as in 1987 and just a bit higher than in 2000. K & S do not show that concern for inequality is high, let alone rising.

K & S cite research by political scientist Larry Bartels to argue that most people understand inequality is rising and that most of those believing it has risen disapprove. That is true, but it is worth emphasizing that 45 percent of those who believed inequality has increased did not call it "a bad thing," and even among those who did believe it was bad, we don't know how many felt particularly strongly in their view.

In early 2011 Gallup polling that asked for an open-ended response to the question of what is America's most important problem, just one percent said inequality, well below pressing issues like "lack of respect for each other" and "foreign aid," to name just two that outranked inequality. Viewed against this evidence, it is unsurprising that the Gallup poll they cite from later in the year indicated only a minority of Americans thought it was important for the federal government to reduce inequality.

In short, there is little evidence that "Americans are deeply troubled about the current level of income inequality," as K & S put it. In fact, one suspects that they are recent converts to this talking point. You can envision them, along with Saez and Norton, initially hypothesizing that it must be that Americans don't understand how much inequality we have and how harmful it is. If we could educate them, they would surely demand more government intervention. Hence, the research study they designed that randomly gives a "tutorial" on income inequality to some participants but not others and that then considers how policy preferences differ between the two groups.

It turned out that the tutorial had little effect on policy preferences toward redistribution, despite it being designed to make inequality look more harmful and redistribution less so than the evidence has established. But the tutorial did reduce respondents' trust in government. From this narrow result, they conclude that rising inequality may have reduced faith in government. So Americans' preferences for government inaction on inequality, it turns out, are not because they are ill-informed about the subject. And if they are well-informed, it can't be that they simply don't care about inequality, right? So Americans, they conclude, are "troubled by" inequality but they need to be convinced "that their government is up to the task of addressing it."

There is more to be said about the study itself, which I will take up in a second essay.

Authors

Scott Winship

Publication: Real Clear Markets

Image Source: © Jim Young / Reuters

Subjective Well‐Being and Income: Is There Any Evidence of Satiation?

Betsey Stevenson and Justin Wolfers — Mon, 29 Apr 2013 00:00:00 -0400

Many scholars have argued that once “basic needs” have been met, higher income is no longer associated with higher in subjective well-being. We assess the validity of this claim in comparisons of both rich and poor countries, and also of rich and poor people within a country. Analyzing multiple datasets, multiple definitions of “basic needs” and multiple questions about well-being, we find no support for this claim. The relationship between well-being and income is roughly linear-log and does not diminish as incomes rise. If there is a satiation point, we are yet to reach it.

Introduction

In 1974 Richard Easterlin famously posited that increasing average income did not raise average well-being, a claim that became known as the Easterlin Paradox. However, in recent years new and more comprehensive data has allowed for greater testing of Easterlin’s claim. Studies by us and others have pointed to a robust positive relationship between well-being and income across countries and over time (Deaton, 2008; Stevenson and Wolfers, 2008; Sacks, Stevenson, and Wolfers, 2013). Yet, some researchers have argued for a modified version of Easterlin’s hypothesis, acknowledging the existence of a link between income and well-being among those whose basic needs have not been met, but claiming that beyond a certain income threshold, further income is unrelated to well-being.

The existence of such a satiation point is claimed widely, although there has been no formal statistical evidence presented to support this view. For example Diener and Seligman (2004, p. 5) state that “there are only small increases in well-being” above some threshold. While Clark, Frijters and Shields (2008, p. 123) state more starkly that “greater economic prosperity at some point ceases to buy more happiness,” a similar claim is made by Di Tella and MacCulloch (2008, p. 17): “once basic needs have been satisfied, there is full adaptation to further economic growth.” The income level beyond which further income no longer yields greater well-being is typically said to be somewhere between $8,000 and $25,000. Layard (2003, p. 17) argues that “once a country has over $15,000 per head, its level of happiness appears to be independent of its income;” while in subsequent work he argued for a $20,000 threshold (Layard, 2005 p. 32-33). Frey and Stutzer (2002, p. 416) claim that “income provides happiness at low levels of development but once a threshold (around $10,000) is reached, the average income level in a country has little effect on average subjective well-being.”

Many of these claims, of a critical level of GDP beyond which happiness and GDP are no longer linked, come from cursorily examining plots of well-being against the level of per capita GDP. Such graphs show clearly that increasing income yields diminishing marginal gains in subjective well-being. However this relationship need not reach a point of nirvana beyond which further gains in well-being are absent. For instance Deaton (2008) and Stevenson and Wolfers (2008) find that the well-being–income relationship is roughly a linear-log relationship, such that, while each additional dollar of income yields a greater increment to measured happiness for the poor than for the rich, there is no satiation point.

In this paper we provide a sustained examination of whether there is a critical income level beyond which the well-being–income relationship is qualitatively different, a claim referred to as the modified-Easterlin hypothesis. As a statistical claim, we shall test two versions of the hypothesis. The first, a stronger version, is that beyond some level of basic needs, income is uncorrelated with subjective well-being; the second, a weaker version, is that the well-being–income link estimated among the poor differs from that found among the rich.

Claims of satiation have been made for comparisons between rich and poor people within a country, comparisons between rich and poor countries, and comparisons of average well-being in countries over time, as they grow. The time series analysis is complicated by the challenges of compiling comparable data over time and thus we focus in this short paper on the cross-sectional relationships seen within and between countries. Recent work by Sacks, Stevenson, and Wolfers (2013) provide evidence on the time series relationship that is consistent with the findings presented here.

To preview, we find no evidence of a satiation point. The income–well-being link that one finds when examining only the poor, is similar to that found when examining only the rich. We show that this finding is robust across a variety of datasets, for various measures of subjective well-being, at various thresholds, and that it holds in roughly equal measure when making cross-national comparisons between rich and poor countries as when making comparisons between rich and poor people within a country.

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Betsey Stevenson
Justin Wolfers

You Can Never Have Too Much Money, New Research Shows

Mon, 29 Apr 2013 00:00:00 -0400

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The Final Countdown: Prospects for Ending Extreme Poverty by 2030 (Interactive)

Laurence Chandy, Natasha Ledlie and Veronika Penciakova — Wed, 24 Apr 2013 10:21:00 -0400

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Laurence Chandy
Natasha Ledlie
Veronika Penciakova

Inequality and Inclusive Growth in Africa: A Conversation with South African Finance Minister Pravin Gordhan

Wed, 17 Apr 2013 16:00:00 -0400

Event Information

April 17, 2013
4:00 PM - 5:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

livefrombrookings on livestream.com. Broadcast Live Free

Africa is the world’s second-fastest growing region, and South Africa is the continent’s economic leader. The country recently hosted the BRICS Summit and has been working hard to promote growth and encourage investment. Yet inequality has been a persistent challenge. As the economies of South Africa and the African continent continue to expand, governments in the region must ensure that such growth follows a sustainable model that creates wage-paying jobs and lifts citizens out of poverty.

On April 17, the Africa Growth Initiative at Brookings hosted a conversation with the Honorable Pravin Gordhan, minister of finance for the Republic of South Africa, on inequality and inclusive growth in South Africa and the African continent. Minister Gordhan’s remarks were followed by a panel discussion with Brookings Senior Fellow Homi Kharas, deputy director of Global Economy and Development. Brookings Vice President Kemal Derviş, director of Global Economy and Development, moderated the discussion.

You can join the conversation on Twitter using #Africagrowth.

How Much Money Are U.S. Workers Earning?

Scott Winship — Mon, 08 Apr 2013 00:00:00 -0400

Mike Konczal has a post up at Wonkblog attempting to clarify why different researchers say such different things about trends in income. I’ll disclose that I gave Mike some feedback on the first draft of this post after he reached out to me—a commendable gesture, particularly since his original draft pegged the post off of my criticism of David Cay Johnston’s claim that income below the top 10 percent had essentially not budged since 1966. Rather than a $59 dollar increase, I argued in this space that the true increase was greater than $20,000.

Mike’s post, relying on the same CBO data I used, argues that “cash wages” for the middle quintile increased by only $1,728 between 1979 and 2007 (or 4.5 percent). Add in fringe benefits (“important from your employer’s point of view,” but perhaps not to a worker?) and the increase is $4,832 (11 percent). Government transfers, by comparison, rose $5,100, or 165 percent. Mike uses these figures to argue that different claims about income trends largely amount to different people being interested in different questions—what labor markets provide workers versus how much people get when broader measures of income are used that include government benefits. So, hey, $59, $1,728, $20,000—maybe they’re all right. He also suggests that if not for government benefits, the income gains of the middle class would be unimpressive.

Here’s the thing though. The CBO data combine the working-age population and retirees. Because retirees are included, the middle quintile contains a lot of households that have no labor income. Mike’s figures are based on a table where households are ranked by “market income,” which consists of not just wages and other labor income (fringe benefits and employers’ share of payroll taxes), but of investment, business, and private retirement income. The middle fifth of the market income distribution became increasingly dominated by retirees over time, which makes the increase in wages appear smaller than the increase for the middle fifth of the working-age population was.

To see that Mike’s estimates are affected by retirement trends, one can use the CBO spreadsheet that was his source. One of the categories of market income CBO distinguishes is “Other Income,” representing “income received in retirement for past services and other sources of income”. That “other sources of income” part is a residual that has little practical importance here. In 1979, the entire “Other Income” category accounted for 4.3 percent of all market income for the middle quintile of households, but by 2007, it was 10.9 percent. So when Mike looks at the middle fifth of market income, the representation of retirees (with little or no wage income) more than doubles over time.

That means his figures underestimate by a lot the growth of wage and labor income of working-age households (which, of course, are the only ones that can have such income). Take his $1,728 estimated increase in wage income. I know of three sources that look at wage trends for earners, removing retirees from the picture. The IRS-based estimates of Thomas Piketty and Emmanuel Saez include tables showing how the wage income of the bottom 90 percent of “tax units” has changed over time. In fact, Johnston’s $59 figure for “the bottom 90 percent of earners” was taken from the Piketty/Saez estimates. However, Johnston failed to use the tables in the Piketty/Saez spreadsheet that were actually restricted to tax units that had wage income. Had Johnston turned to these results, he would have found that from 1966 to 2011, the increase for the bottom 90 percent was $10,500. That is a lot bigger than $59. From 1979 to 2007, the increase (in 2009 dollars this time rather than 2011 dollars to keep comparable to Konczal’s estimate) was $7,400, which is quite a bit bigger than Mike’s $1,728. It’s a 21 percent increase over the period, versus Mike’s 4.5 percent.

CBO and the Census Bureau provide trends in median earnings for workers—the earnings for the worker in the middle of the distribution, which approximates the income of the middle fifth very well. Unfortunately, they don’t provide household or tax unit estimates; dual-earner couples are represented in these estimates separately rather than together as a single unit. According to the CBO data, among all workers between the ages of 25 and 54, the increase in median earnings from 1979 to 2007 was $5,700 in 2009 dollars, an increase of 19 percent. Since many households include two earners, the increase in median household earnings in dollar terms likely was quite a bit higher than $5,700.

The CBO estimates, like those of Piketty and Saez, omit self-employment income. The Census Bureau figures include it but, like the Piketty and Saez estimates, they include low-earning workers not in the prime working years. The Census Bureau median increased by $7,300 from 1979 to 2007 (in 2009 dollars). That’s a gain of 29 percent. Again, the dollar increase at the household level would be expected to be larger.

All three sources exclude people without any earnings. That is the primary reason they better convey how labor markets have performed over time. However, in so doing, they exclude the increasingly large group of working-age men who have dropped out of the labor force, which means they overstate somewhat the increase in earnings. But at the same time they make no adjustment for the downward pull on median earnings caused by rising Hispanic immigration. The Census Bureau figures that are readily available break out non-Hispanic whites separately beginning in 1987. From that year to 2007, the increase in median earnings for all workers regardless of race was 22 percent. But the increase for non-Hispanic whites was 24 percent and for blacks and Asian Americans it was around 35 percent, while for Hispanics it was just 17 percent. In all likelihood, the median earnings among native-born Hispanics rose by an amount more comparable to the other groups. My ongoing analyses show that in practice, the exclusion of non-working men from earnings analyses is less consequential than the failure to account for rising immigration.

A variety of sources suggest, then, that the rise in wage income for middle class households with wages was 20 percent or higher rather than the 4.5 percent Mike cites. The figures in the CBO spreadsheet suggest that adding other labor income (including health insurance and employers’ share of payroll taxes) to wages, the increase would be at least 28 percent. The spreadsheet indicates, though, that government transfers grew more than labor income, leading Mike to suggest that “conservative” claims that middle-class incomes have grown owe much to the growth of government transfers. But he has not only understated the growth of wage and labor income for the working-age population, he has overstated the growth of transfers to them.

The CBO spreadsheet shows that the rising importance of government transfers to “middle-class” incomes is entirely due to Social Security, Medicare, and Medicaid benefits. In other words, the increase in transfers has been about benefits for retired people; it does not indicate that working-age adults and their children have relied on government benefits to prop up their incomes. Consider the most comprehensive measure of income that excludes transfers—market income less federal taxes. For the middle quintile, that measure grew by 23 percent from 1979 to 2007. If we add in all government transfers other than the Big Three to market income less taxes, household incomes for the middle fifth rose by…23 percent. Adding the Big Three, the increase jumps to 34 percent.

Mike needs to treat the working-age population and retirees separately instead of using figures that combine them. What the evidence shows is that both groups have fared well over time—the working-age population because of the labor market, retirees because of employer pensions and senior entitlements. Combining them makes wage growth look smaller than it is and makes the population look more dependent on the safety net than it is. My critique of the Johnston numbers estimated that after-tax household income had risen by $23,100 from 1967 to 2009. Mike suggests that estimates of this sort are large only because of government transfers. But if I adjust the 1979-2009 part of my estimate downward by one third (dividing the 23 percent increase in market income less taxes by the 34 percent increase in comprehensive income and subtracting from one), I still get an increase of over $17,000 between 1967 and 2009.

Mike bemoans that conservatives want to cut government benefits when such spending is “doing serious work to keep median wages from stagnating.” As should be apparent, that construction is wholly unsupported. For that matter, one doesn’t have to identify as a conservative to believe that the left’s negativism is standing in the way of other policy goals. Liberals think the middle class is doing worse over time (or not much better). That necessitates the maintenance or expansion of current benefit levels for entitlements that are heavily focused on the middle class. In reality, the middle class continues to do well over the long run, while the intergenerational mobility of poor kids is stuck at levels we shouldn’t accept. If they could see the picture clearly, liberals would get serious about the impending crisis of senior entitlements—which ensures that there will be no new federal spending for mobility-enhancing interventions—so that they could better address opportunity at the bottom.

Authors

Scott Winship

Publication: National Review Online

Image Source: © Andrew Burton / Reuters

Unemployment Insurance in South Africa: A Descriptive Overview of Claimants and Claims

Haroon Bhorat, Sumayya Goga and David Tseng — Wed, 03 Apr 2013 11:22:00 -0400

INTRODUCTION

The South African economy suffers from the debilitating effects of very high unemployment rates, with African workers, women, youth and those with incomplete schooling disproportionately affected (DPRU, 2011). Not only are official unemployment rates astoundingly high—standing at 25 percent in the third quarter of 2011 (DPRU, 2011)—but many of the unemployed in the South African economy have also never worked before (Banerjee et al., 2008). The unemployment insurance system is a system offering subsistence income to eligible recipients to alleviate the harmful economic and social effects of income loss due to unemployment shocks. It is prevalent in many industrialized economies in the world but much less so in developing countries. In South Africa, both employers and employees contribute to the Unemployment Insurance Fund (UIF), and this fund is then used to provide income replacement benefits such as unemployment, illness, maternity, adoption and dependant’s benefits. In this descriptive overview, we are only concerned with the unemployment insurance aspect of the UIF. The UIF system plays a key role in South Africa’s social security architecture, particularly since it is the only arm of South Africa’s social security that caters for the unemployed—more specifically, the portion of the unemployed that were previously employed. Administratively, unemployment insurance is collected by the UIF, which falls under the auspices of the Department of Labour.

While unemployment insurance is meant to smooth consumption, importantly, it is also meant to improve the transition process of labor market participants from unemployment to employment.1 This research mainly considers the impact of the unemployment insurance system on the labor market through a descriptive analysis of claimants and claims. The administrative data utilized in this paper—and obtained from the UIF—covers all UIF claimants quarterly from 2005Q1 to 2011Q3. The paper is organized into three sections: Section 2 provides an institutional overview of the unemployment insurance system in South Africa, highlighting the main aspects of this system in South Africa as well as changes to the system over time. In Section 3 we undertake a four-part descriptive overview of UIF claimants and claims between 2005 and 2011: First, we briefly dwell on the data and some challenges with it before considering the evolution of the claimant pool over time. Then, we analyze how different subsects of claimants are represented in the claimant pool in comparison to potential contributors. In the final subsection we consider access to the UIF system, potential moral hazard effects and system incentives through an analysis of potential benefits days, credit exhaustion rates and average income replacement rates. Section 4 concludes.

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Authors

Haroon Bhorat
Sumayya Goga
David Tseng

Image Source: © SIPHIWE SIBEKO / Reuters

Overstating the Costs of Inequality

Scott Winship — Mon, 25 Mar 2013 17:16:00 -0400

In recent years, inequality has become the core economic concern of the American left. The gap between the haves and have-nots is understood to be the fatal flaw of our economic system — a fundamental problem that is the source of countless other difficulties. To hear many liberals tell it, increasing inequality is holding back growth, crushing the prospects of the poor and middle class, and even undermining American democracy. Such concerns are prominent in President Obama's rhetoric, and seem also to drive key parts of his policy agenda — especially the relentless pursuit of higher taxes on the wealthy. As the president put it in his second inaugural address in January, he believes "that our country cannot succeed when a shrinking few do very well and a growing many barely make it."

The idea that our economy is held back by inequality is echoed in the claims of some of the nation's most prominent economists. Princeton professor (and Nobel laureate) Paul Krugman and David Card of the University of California, Berkeley, contend that inequality hurts economic mobility. Princeton's Alan Krueger (now chairman of the White House Council of Economic Advisers) and Columbia's Joseph Stiglitz (another Nobelist) think it dampens economic growth. Along with Raghuram Rajan, former chief economist of the International Monetary Fund, Stiglitz also argues that inequality was behind the financial crisis. Cornell economist Robert Frank and former labor secretary Robert Reich are convinced that it fuels the indebtedness of the middle class. The Massachusetts Institute of Technology's Daron Acemoglu believes that inequality enables economic elites to capture the machinery of government and thus ultimately produces national decline.

Read the rest of the article at the National Affairs website or download a fully annotated version of the essay.

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Scott Winship

Publication: National Affairs

Key Findings from "The Hidden Supply of High-Achieving, Low-Income Students"

Thu, 21 Mar 2013 14:55:00 -0400

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The Evolution of Household Income Volatility

Karen Dynan, Douglas Elmendorf and Daniel Sichel — Sun, 20 Jan 2013 00:00:00 -0500

Editor's Note: The full version of this paper is available at the website for the B.E. Journal of Economic Policy and Analysis. An earlier working version of the paper can be directly downloaded above.

Abstract

Using a representative longitudinal survey of U.S. households, we find that household income became noticeably more volatile between the early 1970s and the late 2000s despite the moderation seen in aggregate economic activity during this period. We estimate that the standard deviation of percent changes in household income rose about 30 percent between 1971 and 2008. This widening in the distribution of percent changes was concentrated in the tails of the distribution. The share of households experiencing a 50 percent plunge in income over a two-year period climbed from about 7 percent in the early 1970s to more than 12 percent in the early 2000s before retreating to 10 percent in the run-up to the Great Recession. Households’ labor earnings and transfer payments have both become more volatile over time. As best we can tell, the rise in the volatility of men’s earnings appears to owe both to greater volatility in earnings per hour and in hours worked.

1. Introduction

Researchers have found it relatively straightforward to document changes in the volatility of the U.S. economy as a whole over the last several decades. The aggregate U.S. economy entered a period of relative stability known as the Great Moderation in the mid-1980s and, much more recently, has been in dramatic flux since the onset of the financial crisis and Great Recession in 2007 and 2008. However, aggregate trends do not necessarily translate into trends in the experiences of individual households. For example, the Great Moderation is generally thought to be a period over which the economy became more dynamic, with globalization, deregulation, and technological change increasing the competitive pressures and risks faced by workers. Given these developments, it is not clear that the economic environment facing individual households was in fact more stable during this period. Thus, to the extent that one is interested in household economic security, one is compelled to consider micro data. Accordingly, a large literature has developed that directly examines the volatility of earnings and income at the household level. While income volatility is not the same thing as the risk or uncertainty faced by households, changes in volatility are likely to be associated with changes in risk and uncertainty.

To date, this literature has been inconclusive. Starting with the seminal work of Gottschalk and Moffitt (1994), many studies have found that individual earnings and household income have become more volatile during the past few decades. That said, there are some notable exceptions, which find no increase or a decline in the volatility of earnings and total household income (such as CBO, 2008, and Dahl, DeLeire, and Schwabish, 2011).

This paper examines household income volatility using data from the Panel Study of Income Dynamics (PSID). As the longest-running representative survey of U.S. households, the PSID is an ideal vehicle for considering how the household economic environment has changed. In contrast to much of the early literature in this area, we focus on the volatility of overall household income as opposed to the volatility of labor earnings. To be sure, the evidence on labor earnings provides important insights into labor market dynamics. We believe, however, that the broader concept of household income brings an important additional element to the table for two reasons. First, some important questions of economic welfare hinge more on the resources available to households (and the volatility of that stream of resources) rather than on the labor earnings of a single member of that household. Moreover, for macroeconomists interested in understanding the micro foundations of aggregate household-sector behavior, household income provides the natural starting point. Although a few other studies have looked at the volatility of household income in the PSID, we are the first (to our knowledge) to incorporate survey results through the late 2000s.

To make the analysis as transparent as possible, we do not estimate a formal model of income dynamics but rather document changes over time in the cross-sectional distribution of income changes. We carefully investigate, and correct for, measurement problems in the data. We also explore the evolving volatility and correlations of movements in various components of income (including earnings) and the evolving volatility of related characteristics such as hours worked and earnings per hour.

To summarize our results, we estimate that the volatility of household income—as measured by the standard deviation of two-year percent changes in income—increased about 30 percent between the early 1970s and the late 2000s. The rise in volatility did not occur in a single period but represented an upward trend throughout the past several decades; it occurred within each major education and age group as well. Yet, the run-up in volatility was concentrated in one important sense: It stemmed primarily from an increasing frequency of very large income changes rather than larger changes throughout the distribution of income changes.

Turning to the components of income, we estimate notable increases in the volatility of labor earnings and transfer income and a small increase in the volatility of capital income. Household labor earnings (combining earnings of heads and spouses before estimating volatility at the household level) became more volatile even though the volatility of individual earnings (heads and spouses taken as individual observations) edged down. The explanation is that women’s earnings became less volatile while men’s earnings became more volatile, and the latter matters more for household earnings because men earn more than women on average. We show that rising volatility in men’s earnings owes both to rising volatility in earnings per hour and in hours worked, though our interpretation could be affected by changes in PSID methodology. And we demonstrate that earnings shifts between household members, as well as shifts in market income and transfer income, provide only small offsets to each other.

The limitations of our analysis bear emphasis. First, an increase in the volatility of household income does not imply a corresponding increase in risk or uncertainty. Our calculations distinguish only slightly between voluntary and involuntary changes in income, they do not include shocks to desired spending, and they do not account for adjustments to saving and borrowing that can buffer income shifts. Second, our findings are based on a particular methodology applied to a single dataset. Given the wide range of findings across studies that use different techniques and different data sets, further research is needed to reconcile the various results before economists can have a high degree of confidence in the facts about household income volatility. Moreover, our analysis ends in 2008 and therefore precedes much of the recent turmoil; once the relevant data become available, researchers undoubtedly have much work to do to establish how income dynamics changed following the Great Recession.

The next section of the paper discusses how we measure volatility using PSID data. Subsequent sections present our results on the evolution of volatility of individual labor earnings, of the components of household income, of household income, and of hours worked and earnings per hour. We then discuss how our results fit in with the broader literature. A final section concludes.

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The Evolution of Household Income Volatility

Authors

Karen Dynan
Douglas Elmendorf
Daniel Sichel

Publication: The B.E. Journal of Economic Analysis & Policy

Image Source: © Rebecca Cook / Reuters

Keep the Recovery Going with a Temporary Super Deduction for Charitable Giving

Isabel V. Sawhill — Wed, 28 Nov 2012 00:00:00 -0500

With the fiscal cliff looming, there is a risk that even a partial slide off the cliff will slow or reverse the recovery. One way to cope with such a risk is to provide a temporary or accelerated deduction for charitable giving. The basic idea is to provide a large incentive for people to spend money now rather than later, thereby creating jobs, but in a way that would be acceptable to both political parties.

The President has proposed that current tax rates be extended for the middle class but allowed to expire for the wealthy. Republicans are arguing that any tax increase at this time is unacceptable. Even though estimates suggest that no more than 2 percent of all households and 3 percent of all small businesses would be affected by allowing tax cuts for the wealthy to expire, the Republican concern is that this would retard economic recovery.

There are any number of possible compromises that might split the difference between these two partisan views. One would be to change the definition of “wealthy” to include just those with incomes over $500,000 or even $1,000,000. Another would be to raise revenues not by changing rates but instead by limiting deductions for those in the higher brackets as the President himself has proposed in recent budgets.

I want to propose still another idea that has the potential to help break the political gridlock. It would allow rates on the wealthy to rise as they are scheduled to do in January but include a new but temporarily higher deductions for charitable giving.

The new deduction for charitable giving would only be in effect for one or two years but it would be substantial. For example, a gift of $1,000 that would reduce a high-income household’s taxes by almost $400 under the new top marginal rate, might be increased by 50 percent, bringing it to $600. The incentive to give now rather than later would be correspondingly heightened. Based on evidence on the responsiveness of donations to the price of giving, charitable giving might rise by as much as 50 percent as a result (although much less than this over the longer-run).

The rationale for this proposal is threefold. First, it would create jobs. The recovery is still very fragile and by increasing the value of the charitable deduction but making it temporary we would move a lot of charitable giving into a period when increased spending is needed. The nonprofit sector is much larger than most people realize, accounting for 1 out of every 10 jobs in the economy. Under my proposal, the affluent would have less after-tax income as their taxes rose but they would also have a much bigger incentive to spend rather than save out of all of their income as well as their wealth over the next year or two. Under some reasonable assumptions the net effect on jobs and the economy would be positive.

Second, the option of keeping their taxes low by increasing their charitable giving would take some of the sting out of higher tax rates on the wealthy. If they hate seeing more of their money going to Uncle Sam, they have a new way to avoid paying taxes. Although the super-deduction for charitable giving would not last forever, it might encourage some affluent households to get off the sidelines and help to establish the philanthropic habit that has always distinguished the United States from other countries.

Third, the nonprofit sector would benefit. Given the need for major spending cuts over the next decade, the voluntary sector is going to need to fill some big holes in everything from the social safety net to community services. Charitable organizations vary enormously from those that support the arts, education, and health to those that provide assistance to the poor and to local community organizations of all kinds. Healthy competition among all of these organizations insures that the money is spent in line with public preferences and not according to bureaucratic dictates from Washington.

Some careful thought would need to be devoted to the details of such a plan. Would faith-based organizations that claim about a third of total charitable giving be eligible? Would there be limits on the amount going to endowments versus operating expenses in the affected nonprofits? Should the types of charitable entities as opposed to all 501(c)3 organizations be specified in the law? These decisions could be negotiated along with the size and timing of the super-deduction.

To be clear, this proposal is no substitute for a broader effort to reform the tax system which will likely move in the direction of limiting most, if not all, deductions. It is a short-term measure that deals with some of the fiscal drag associated with the cliff, makes raising taxes on the wealthy more palatable, and temporarily boosts the health of the voluntary sector. Over the longer term, it might be combined with a hard cap of $35,000 on deductions starting in 2014, but a cap that excludes charitable giving as proposed by the think tank, Third Way.

Authors

Isabel V. Sawhill

Publication: Yahoo! Finance

Image Source: © Kevin Lamarque / Reuters

Rising Inequality in America and Around the World

Tue, 27 Nov 2012 15:30:00 -0500

Event Information

November 27, 2012
3:30 PM - 5:00 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

Income inequality has been on the rise in the United States since the late 1970s— a trend that is also surfacing in many other countries around the world. Even among those who view inequality neutrally— or even positively— for economic growth, most agree that some of the features that accompany it, such as reduced opportunity and low social mobility, increased prevalence of poverty, and stagnation of the middle class, are undesirable.

On November 27, the Brookings Institution in cooperation with the Carnegie Endowment for International Peace and Oxfam America hosted a discussion on the implications of rising U.S. and global inequality. The discussion will examine the facts and trends underlying increasing inequality, and explore what kinds of policies are desirable for addressing inequality. Panelists included: Uri Dadush of the Carnegie Endowment for International Peace, co-author of Inequality in America: Facts, Trends, and International Perspectives (Brookings Press, 2012); Chrystia Freeland of Thomson Reuters, author of Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (Penguin Press, 2012); Branko Milanovic, author of The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality (Basic Books, 2010); and Ray Offenheiser, president of Oxfam America. Vice President Kemal Derviş, director of Global Economy and Development at Brookings and a co-author of Inequality in America, moderated the discussion. The panelists discussed findings and observations from their respective books on inequality as well as those of other recent books on the topic by Joseph Stiglitz and Francois Bourguignon.

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Rising Inequality in America and Around the World

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A New Look at How the Tax Code Works for Working Families

Elizabeth Kneebone — Mon, 19 Nov 2012 16:00:00 -0500

As the clock ticks down to January 1, and lawmakers try to hash out a deal to avoid the fiscal cliff and address the expiration of the Bush tax cuts, new data on taxpayers in the United States--collected from federal tax returns and available down to the ZIP code level through Brookings’ EITC Interactive--provide an important perspective on the impact of the tax code on families and communities across the country.

For instance, the latest EITC Interactive data--which represent tax returns filed in January through June of 2011--show that key provisions in the tax code proved responsive to the Great Recession, helping working families to weather the downturn.

Roughly one in five tax filers claimed the Earned Income Tax Credit (EITC) in TY2010--a tax break for workers with low incomes--compared to 16 percent of filers in TY2007. In part the increase in EITC receipt reflects rising unemployment and falling incomes that may have led more workers to become eligible for the credit, but it also reflects targeted expansions to the credit made through the American Recovery and Reinvestment Act (ARRA) to help strengthen the safety net and stimulate local economies.

In TY2010, nine states saw anywhere from one quarter to one third of their taxpayers claim the EITC, led by Mississippi, Louisiana, Alabama, Georgia, and Arkansas. And 10 states experienced an uptick in the rate of EITC receipt of 5 percentage points or more over the course of the recession, led by Mississippi, Georgia, Arizona, Idaho, and Tennessee. No state experienced a decrease in EITC receipt during the downturn.
More than half (60 percent) of EITC filers also benefitted from the refundable portion of the Child Tax Credit (ACTC) in TY2010--a tax benefit for low- and moderate-income working families with children that was also expanded temporarily through ARRA—compared to 45 percent in TY2007.
All together, EITC filers claimed an average credit of $2,247 in TY2010, and for those EITC filers who who received it, the ACTC boosted the average refund by $1,234.

See the map: Share of Filers Claiming EITC by State, Tax Year 2010

The release of the Census Bureau’s Supplemental Poverty Measure (SPM) last week underscores the importance of these tax credits for low-income working families. If it weren’t for the EITC and ACTC, the Census Bureau estimates that the U.S. poverty rate in 2011 would have been 2.8 percentage points higher, at 18.9 percent. The impact on child poverty would have been even greater: without these credits the child poverty rate would have reached 24.4 percent rather than 18.1 percent under the SPM definition.

Though the SPM is not available for smaller, sub-state geographies, through Brookings’ EITC Interactive policymakers and other stakeholders can find estimates of the number of filers benefitting from these credits--and the dollar amounts claimed--for every congressional and state legislative district in the country, and for every ZIP code, municipality, county, metro area, and state.

Contrary to Mitt Romney’s narrative about the 47 percent “takers” and giveaways to the Democratic base, these data show that the impact of these credits is far-reaching and broadly shared (as the list of “red” states above suggests)--crossing party and geographic lines to reach struggling working families at tax time. And that phrase bears repeating: These are taxpayers who are working.

Part of welfare reform in the late 1990s was an explicit decision to do less via traditional cash assistance and do more through the tax code to encourage work. Years’ worth of research illustrates the success of the EITC as a policy to promote work and better economic outcomes for low-income families. Updated profiles of the EITC-eligible population in TY2010 give greater insight into who these taxpayers are. More than three-quarters of these taxpayers live in family units; more than 54 percent are white; and almost half (46 percent) have some higher education. The typical EITC-eligible taxpayer has an adjusted gross income of just $13,905, and is most likely to have earned that income working in the retail, health care, accommodation and food service, construction, and manufacturing industries. These are workers filling the increasing number of low-wage service sector jobs the economy has been churning out in recent years, and in industries that bore the brunt of the latest downturn.

Discussions over the fiscal cliff and longer-term tax reform will inevitably include calls for more taxpayers to have “skin in the game.” But that’s not only a distraction from the real issues, it’s a distortion of reality. We made a choice in the 1980s and the 1990s to support work and alleviate poverty through the federal income tax. And all the evidence--federal, state, and local--shows that it’s working, for a broad base of Americans. Taxing hard-working families deeper into poverty is no fix for our short- or long-run budget problems.

Authors

Elizabeth Kneebone

Publication: The Avenue, The New Republic

Changing Sources of Income Among the Aged Population

Barry P. Bosworth and Kathleen Burke — Thu, 01 Nov 2012 00:00:00 -0400

Abstract

This paper focuses on an explanation for the large shift over the past two decades in the composition of the income of the aged (65+), increasing the role of earned income and reducing the importance of income from their own assets. We find that the pattern of change is consistently reported in all of the major household surveys. The increase in the importance of labor income can be attributed to delayed exit from the labor force by workers at older ages. We attribute the increase in work time to a rise in the proportion of more educated workers who choose to continue working, changes within the pension system that previously encouraged early retirement, and a decline in the availability of retiree health insurance. The increase in work time is concentrated among the highest income groups and those with the most education, suggesting that it is largely voluntary. The fall in asset income can be traced to lower interest rates and a reduced propensity for the aged to convert their wealth to annuities. It does not reflect reduced wealth at older ages. A measure of the annuity equivalent of their wealth holdings suggests that there has been no decline for aged units. We also find only a weak relationship between changes in asset income and the decision to remain in the workforce.

Download the full paper from the Center for Retirement Research at Boston College »

Authors

Barry P. Bosworth
Kathleen Burke

Publication: Center for Retirement Research at Boston College

Life Expectancy and Rising Income Inequality: Why the Connection Matters for Fixing Entitlements

Gary Burtless — Tue, 23 Oct 2012 11:15:00 -0400

Nearly all indicators of inequality show American income disparities have increased since the late 1970s. The magnitude of change in inequality is sensitive to the particular income measure we use, but essentially all measures imply that income gaps are bigger today than they were three decades ago.

Statisticians analyzing the most comprehensive income measures find that much of the jump in inequality was due to gains at the very top of the distribution. More than three-quarters of the relative income gains enjoyed by Americans in the top fifth of the income distribution were obtained by people in the top 1% of the distribution. We saw an uptick of inequality among households in the bottom 95% of the income distribution in the 1980s, but this trend seems to have run its course by the end of that decade.

The growth in inequality has been a topic of intense interest to social scientists for the past quarter century. More recently it has become the focus of political debate and press attention. Although the effects of increased inequality remain uncertain, there has been a flurry of research aimed at understanding possible links between inequality and a variety of social and economic trends.

One of the most basic indicators of well-being is life expectancy. Analysts have long recognized the powerful association between personal income and expected life spans. People with higher incomes tend to live longer than people with lower incomes. Statistical tabulations suggest that the relationship is nonlinear. A $10,000 increase in annual income does more to lift the life expectancy of someone who lives on a meager income than it does to boost the life span of someone who is already well off. This suggests that transferring $10,000 a year from someone who is rich to someone who is poor should lift the expected life span of the poor recipient more than it hurts the life span of the rich donor. It therefore seems logical to expect that a more egalitarian income distribution would lift average life expectancy.

We can conceive of societies where a reduction in inequality would surely add to average life spans. Of course, we can also imagine societies where the attempt to reduce inequality through redistribution would reduce economic growth, generate political turmoil, and slow the rise in average incomes. If you oppose income redistribution because you fear its potential impact on politics or growth, you may not be impressed by the argument that longevity would improve a bit faster if there were less inequality.

As many observers have noted, the United States has exceptionally wide inequality for a high-income country. It also has relatively low average life expectancy. Among 34 countries in the Organization of Economic Cooperation and Development (OECD), the U.S. ranks 27^th in life expectancy at birth. If we limit our comparison to the 21 large OECD countries with high incomes, America ranks dead last. This lowly rank is especially surprising because average income in the U.S. is about 40% higher than it is on average in other OECD countries, and real health spending per person is about 150% higher than it is in the other countries. Of course, wide income disparities in the U.S. mean that low-income Americans have lower incomes than people in comparable positions in the income distributions of many other rich countries.

A recent study of American life expectancy uncovered trends that may be partly traceable to increased income inequality. S. Jay Olshansky and his colleagues found evidence that white men and women who lack high school diplomas have seen a noticeable drop in life expectancy over the past three decades. These groups have struggled as job prospects for less educated workers have dried up. Their declining economic position may be worsening their chances of living a long life. Another interpretation is that the fraction of whites who fail to complete high school has shrunk, so the apparent decline in dropouts’ life expectancy may be a result of shifts in the composition of the population that lacks a high school diploma. Expected life spans for whites in general, and indeed for Hispanics and African Americans, continue to improve.

An older study of changes in life expectancy used Social Security records to determine the relationship between workers’ position in the wage distribution and their mortality rates. Hilary Waldron, a Social Security Administration researcher, estimated mortality rates of white men born between 1912 and 1941 who had earnings between ages 45 and 55. She divided these men according to their average position in the earnings distribution when they were between 45 and 55, and she then determined the effects of their income position on their mortality rates between ages 60 and 89. Between ages 60 and 80 men with a worse earnings position had a higher mortality rate. More disturbingly, the mortality differential between low-earnings and high-earnings men increased substantially over time. The mortality rates of both low-earnings and high-earnings men improved during the period Waldron examined. However, improvements in life span overwhelmingly favored the men at the top of the earnings distribution. Men born in 1912 who had earnings in the top half of the wage distribution lived 1.2 years longer than men born in the same year who had earnings in the bottom half of the earnings distribution. For men born in 1941 the difference in life expectancy soared. Better paid men in the younger birth cohort can expect to live 5.8 years longer than men born in the same year who are in the bottom half of the wage distribution.

It is not clear whether the growing life expectancy gap between the affluent and less affluent can be traced to widening inequality. It may be due instead to growing differences in eating habits, smoking, exercise, and lifestyle habits that favor the affluent over the less affluent.

Even if we cannot be confident of our explanation of the trend, some of its policy implications should be plain. If gains in expected life spans are increasingly concentrated among the well-to-do, we should not ask the less affluent to bear the main burden of an aging society. One proposal to deal with the financial problems of Social Security and Medicare is to lift the age of eligibility for benefits. This policy makes sense if the gain in life spans is enjoyed equally by the rich and poor. It makes less sense to ask the poor to wait longer for retirement benefits when a disproportionate share of the life span improvement is concentrated among the affluent.

Authors

Gary Burtless

Publication: Real Clear Markets

Five Myths About the 47 Percent

William G. Gale and Donald B. Marron — Fri, 21 Sep 2012 00:00:00 -0400

1. Forty-seven percent of Americans don’t pay taxes.

The most pernicious misconception about people who don’t pay federal income taxes is that they don’t pay any taxes. That oft-heard claim ignores all the other taxes Americans encounter in their daily lives. Almost two-thirds of the 47 percent work, for example, and their payroll taxes help finance Social Security and Medicare. Accounting for this, the share of households paying no net federal taxes falls to 28 percent.

And those aren’t the only other taxes they bear. According to economic research, the corporate income tax discourages domestic investment; that depresses wages, so workers are effectively paying some of the corporate tax. More directly, many households pay federal taxes on gasoline, beer and cigarettes. And then there are state and local sales, property and income taxes — all of which are often less progressive than the federal income tax. Putting all these together, a family of three with an income of $30,000 would owe no federal income tax (in fact, they would get money back). But they could easily pay more than $4,500, or 15 percent of their income, in taxes.

2. Members of the 47 percent will never pay federal income taxes.

Politicians and commentators often talk about those who don’t pay income taxes as though they’re in a special club with lifetime membership. In fact, it’s a highly diverse group, some of whom move in and out from year to year.

When they first join the workforce, for example, young people may not earn enough to pay federal income taxes. The same is true for many of the temporarily unemployed, working parents and entrepreneurs whose businesses experience a loss. But most of these people look forward to the day, perhaps in just a year or two, when their incomes will rise and they will join or rejoin the 53 percent of Americans who do pay federal income taxes.

The reverse is true for many senior citizens: They may pay no federal income tax in retirement, but most did during their working years.

3. Many high-income people game the system to pay no income tax.

Our jerry-rigged tax code leaves many Americans with a nagging sense that other people are exploiting loopholes to avoid taxes — and the rest of us have to make up the difference. Sadly, there’s an element of truth to that. But gimmickry by high-income taxpayers has essentially nothing to do with who does and doesn’t pay income taxes. Our colleagues at the Tax Policy Center estimate, for example, that households with cash incomes of $200,000 or more account for less than 0.1 percent of the 47 percent.

The vast majority of people who pay no federal income tax have low earnings, are elderly or have children at home. They are exempt from the income tax because of features Congress added to the tax code, thanks to bipartisan efforts, to help these groups. For example, Presidents Ronald Reagan and Bill Clinton both favored the earned-income tax credit (EITC), which has helped millions of families stave off poverty.

About half of these households don’t pay federal income tax simply because their incomes are low. More than one-fifth are retirees who benefit from tax breaks for seniors, including an exemption for most Social Security benefits. And another one-seventh are working families with children whose income tax liability is eliminated because of the child tax credit, the EITC, or the child and dependent care credit. Together, these three groups of taxpayers account for almost 90 percent of the households that pay no federal income tax.

4. The 47 percent vote Democratic.

In the leaked video that went viral this past week, Romney counts the 47 percent as people who will vote for President Obama “no matter what.” There is no direct way to match people’s tax records and voting habits, so we have only circumstantial evidence on how the 47 percent votes — but they certainly aren’t all shoo-ins for Obama.

Let’s take low-income and elderly households, which are particularly likely to pay no federal income taxes. Low-income households do tend to vote Democratic — when they vote. But fewer than half of individuals in households with incomes below $30,000voted in 2008, according to the census, compared with about 60 percent of people with higher incomes. On the other hand, Romney appears to hold a lead over Obama among elderly voters, a group that votes enthusiastically.

5. Tax increases are the only way to bring more of these households onto the tax rolls.

Romney’s comments about the 47 percent raise the question: If too many Americans pay no federal income tax, how should we reduce that number? One strategy would be to cut back on tax benefits. The expansion of the child credit under President George W. Bush in 2001, for example, removed many households from the rolls. Allowing that expansion to expire at year’s end — one factor that could lead to falling off the “fiscal cliff” — would add many back. But few observers and almost no politicians endorse that idea or other changes, such as subjecting more Social Security benefits to taxation, that would have similar effects.

But there is another way. The share of households paying no income tax is near record highs not only because of tax policy but also because of the struggling economy. Higher earnings, particularly for low- and moderate-income workers, would move more Americans into the income-tax-paying category. Indeed, projections show that the share of households paying no federal income tax will decline by more than one-fifth in the coming decade because of economic growth and inflation. That drop would be faster and steeper with a stronger, prolonged recovery, which would give more Americans the pleasure of paying federal income taxes.

Authors

William G. Gale
Donald B. Marron

Publication: The Washington Post