New Data in the Inequality Debate

I have long suspected that there are substantial problems in the income data that folks on the sky-is-falling side of the inequality and risk debate are using.  One point I have made several times is that rising entrepreneurship tends to void many of the conclusions made by these folks who are commenting from an "everyone is an office or factory worker" paradigm.  In particular:

  • Entrepreneurs have much riskier income profiles.  To a statistician mining tax returns, I look like I have fallen from a good upper middle-class job into, well, poverty for the first two years of my new company.  I haven't, but my data point is being used by Jacob Hacker and others to say that somehow there is a great risk-shift that is being foisted on the middle class against their will.  In fact, I and the growing number of people who run their own small businesses choose this life.
  • The introduction of the "S-corporation" means that an increasing amount of entrepeneurial income is showing up on 1040's.  With C corporations, the incentive was to delay taking any income from the company for as long as possible to avoid double taxation, preferably taking it at time of the company's sale.  With S-Corporations, there is no double taxation problem so corporate income flows through to the individual 1040.  Business owners are suddenly reporting more income not because they are making more, but because they are recognizing it in a different way in a different tax form.  Much of the rich getting richer is actually just the rich recognizing their corporate income in small businesses in a different way.

Much more here from Chris Edwards at Cato, reporting on an interesting report coming soon from Alan Reynolds.