Do Your Care About Brackets, or People?

A lot of the lefty sites are gearing up the "poor aren't sharing in the benefits" bandwagon again.  This is usually brought out of the garage whenever someone wants to put a really progressive soak-the-successful tax plan on the table.  So get ready.

The key to parsing their argument is to understand the following distinction:  Do you care about quintiles, or individuals?  Because if you care about quintiles, then there is no doubt that the real median income of the lowest income quintile has not advanced much over the last 15-20 years.  But quintiles are not individuals, and the evidence is that individuals are still doing well, whatever bracket they begin in.  Because you see, while the average for the bottom quintile may not be much higher than the average for that bracket a decade ago, the fact is that the people in that bracket have changed.   As Mark Perry writes:

A common misperception is that the top or bottom income quintiles, or the top or bottom X% by income, are static, closed, private clubs with very little turnover - once you get into a top or bottom quintile, or a certain income percent, you stay there for life, making it difficult for people to move to a different group. But reality is very different - people move up and down the income quintiles and percentage groups throughout their careers and lives. The top or bottom 1/5/10%, just like the top or bottom quintiles, are never the same people from year to year, there is constant turnover as we move up and down the quintiles.


He quotes some stats from Jeffrey Jones and Daniel Heil:

How much income mobility exists in America? Research consistently affirms that there is substantial upward income mobility in the United States, with the lowest income earners typically showing the strongest results. A Treasury Department study of the 1996"“2005 period used IRS income tax data to discern considerable mobility: more than 55% of taxpayers moved to a different income quintile. More than half the people in the lowest fifth of earners moved to a higher quintile over this period (29% to the second, 14% to the third, 10% to the fourth, and 5% to the highest).

Moreover, there is a great deal of movement in and out of the top income groups. The Treasury data show that 57% "of households in the top 1% in 2005 were not there nine years earlier." The rich sometimes get richer, but they get poorer as well. The study also reveals that income mobility has increased, not decreased, during the past twenty years. For example, 47.3% of those in the lowest income quintile in 1987 saw their incomes increase by at least 100% by 1996. That number jumped to 53.5% from 1996 to 2005.

The Pew Economic Mobility Project tried to track actual people, and not brackets, from tax returns.  This is an imperfect science, but the only real way to look at income mobility.  They found that 90% of white children and 73% of black children whose parents were in the lowest income quartile in the base period were later to be found in higher income quartiles.  But this chart, from the same study, is really telling:

6a00d834518ccc69e201157116e822970b-800wi(click to enlarge)

That is a pretty amazing picture, marred only by something apparently bad occurring with the kids of middle class African Americans.

So how can there be so much income gain everywhere without the averages for the lower quintile increasing.  I would offer at least two explanations:

  1. Immigration. As people gain skills and seniority, they progress to higher income brackets and out of the lower quintile.  However, there is a constant stream of low-skill immigrants moving to this country to fill in the bottom quintile.  It we were to do a quintile analysis apples to apples leaving out new immigrants in the period, I guarantee you would see the median income for the lower quintile increase.  As I wrote before:

    Frequent readers will know that I am a strong supporter of open immigration....However, I am tempted to become a close-the-border proponent if the left continue to use numbers skewed by immigration to justify expansions of taxation and the welfare state.  Whether they are illegal or not, whether they should be allowed to stay or not, the fact is that tens of millions of generally poor and unskilled immigrants have entered this country over the last several decades.  These folks dominate the lower quintile of wage earners in this country, and skew all of our traditional economic indicators downwards.  Median wages appear to be stagnating?  Of course the metric looks this way "” as wages have risen, 10 million new folks have been inserted at the bottom.  If you really want to know what the current median wage is on an apples to apples basis back to 1970, take the current reported median wage and count up about 10 million spots, and that should be the number "” and it will be much higher.

    By the way, even for these immigrants, their position in the lower quintile represents upward mobility for them.  Being in the middle of the lower quintile probably is a huge improvement over where they were in their home country - almost by definition, or they would not be working so hard to get here.

  2. Safety Net. Some large portion of the bottom quintile are supported by the US government's safety net.  And there are pretty good fiscal reasons why the typical real incomes generated by that safety net have not increased over the last 20 years.  And even beyond the fiscal issues, there are incentives issues as well -- at some point, increasing how lucrative the safety net is can reduce the incentive to get off the safety net and find a job.  Just ask the Swedes.  There is a delicate balance between humanity and sustaining folks vs. killing their motivation.In some ways the left's use of the lack of lower quintile progress as an indictment of American capitalism is wildly ironic.  Basically what they are saying is that the 80% of people who support themselves through capitalist endeavor are doing progressively better but the 20% of the people supported by the government are stagnating -- and therefore we need to increase the role of government.
  • Michael

    The Heritage Foundation points out that non earned cash and earned and non earned benefits aren't counted when calculating poverty levels. Take a live in nanny. This person can expect to receive housing, food, transportation and likely some medical coverage, but be paid only minimum wage. This person will always be considered poor when governments or most groups calculate poverty. The same holds true for the retired and those receiving public or private aide.

    The other area of poverty research I find interesting is than when you compare the standard of living of US poor, you compare them to the middle class in Europe, not their poor.

  • epobirs

    Funny, I've been poor, by the numbers, nearly every one of my 45 years. Yet I enjoy an existence that would be the envy of a major portion of the world. I'm at a loss as to how any able bodied and sane person in the US could not match my situation with a minor bit of effort. Heck, they should be able to do far better than me if they really cared. The primary impediment to my getting ahead in life has been periods of severely bad attitude. It certainly hasn't been for lack of opportunity.

  • Ian Random

    I heard some lefty talk about relative income as a metric. That is if I earn $100k and live near Beverly Hills, I'd be poor.

  • Craig Loehle

    Age is a huge factor. People in their teens and early twenties often earn near poverty level, but most move up over time. Conversely, the retired, who live a long while after stopping work, may be in "poverty" but have no kids to raise and have paid off their house and are not trying to save for retirement. Since "poverty" is always redefined relative to current conditions, it will always appear there are poor. I offer my garage sale index. Over the last 30 years I have noticed that at first I could clear out almost everything that I put out. Now, those who stop pick through and take very little. We've quit having them--not worth the trouble. We even had one going when a charity truck stopped next door. They wouldn't take the furniture we had out--not nice enough. The standards of the "poor" are rising.

  • DrTorch

    Excellent summary. I read an article just a few days ago talking about how the lowest income bracket hadn't changed. But the people in that bracket had, Agghh!

    Like Ian, I have noticed that "poor" is often measured relatively. Now we talk about ratios between incomes.

    I think Craig puts out a great idea for an experiment. Have garage sales w/ identical items in different locales, and different years as the economy changes. I too have noticed changes thru the years.

  • orthodoc

    A further point is that the household size in the different quintiles differs. The bottom quintile averages 1.7 people/household, while the top quintile averages 3.1 people. So almost by definition, the top quintile will have more income, because there are more people earning a living.

    Also, courtesy of the Heritage Foundation, the following are facts about persons defined as "poor" by the Census Bureau, taken from various government reports:

    Forty-six percent of all poor households actually own their own homes.
    Seventy-six percent of poor households have air conditioning.
    Only 6 percent of poor households are overcrowded. More than two-thirds have more than two rooms per person.
    The average poor American has more living space than the average individual living in Paris, London, Vienna, Athens, and other cities throughout Europe.
    Nearly three-quarters of poor households own a car; 30 percent own two or more cars.
    Ninety-seven percent of poor households have a color television; over half own two or more color televisions.
    Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.
    Seventy-three percent own microwave ovens, more than half have a stereo, and a third have an automatic dishwasher.

  • morganovich

    it seems to me that productivity increases are another key issue here. the reason the bottom quintile does not get paid more over time is that it has not become more productive.

    wages track output. output/person tracks productivity changes.

    there has been a dramatic change in the productivity of clerical workers. imagine the number of applications processable by of a loan officer with a computer as opposed to one without.

    this productivity enhancement has been less pronounced (but still present) in fields like manufacturing.

    but get down to fields like transport or even more dramatic flipping burgers and cleaning pools and there has been no real increase. of course real wages are stagnant. so is productivity. there's just not that much more you can do to flip a faster burger.

    these low skill jobs will always have stagnant wages unless there is an acute labor shortage.

  • JoshK

    This is touched on above:

    Many people in the bottom quintile are paid at cash jobs. If they would switch to proper reporting they would loose benefits and pay taxes. If you look at the net position of someone like this then they are hardly poor.

  • Bearster

    "Frequent readers will know that I am a strong supporter of putting air in all four tires….However, I am tempted to become a deflate-all-four-tires proponent if the left continue to ... justify puncturing one tire."

    This is what I call "compensation". You can't advocate for doing the wrong thing to compensate for some other wrong being perpetrated by the left or anyone else. The result, in the case brought up by Coyote, is that even the libertarians would agree that immigration is bad for America, and the lefties would switch to some other fallacious argument to soak the rich.

  • Larry Sheldon

    I am looking for an analysis like this for males and for females.

    Of particular interest is the "Top 5%" group and the mobility in or out by gender.

  • Methinks

    Larry,

    I doubt you'll find many women in the top quintile. Women tend toward safe, but lower paying professions and take breaks to have children. Thus, there are fewer of us in the risky, pressurized and high paying professions.

  • Mark

    The Heritage Foundation points out that non earned cash and earned and non earned benefits aren’t counted when calculating poverty levels"

    Exactly. This is a game that the left plays to drum a case to the unsuspecting mass voter. The true fact is that total real consumption of the lowest quintile has kept pace with other income groups and that total consumption from these households is about 2.5 times their "income".

    Another place that the left likes to use these distorted numbers is when calculating "income tax burderns". FOr example, if you search for a report from Minnesota (my home state) called the "Tax Incidence Report" you will see a report that claims that the "poor" pay a higher tax burden than the "rich". But the fact is that these reports simply ignore total household, um, lets call it cash flow. For example, the tax incidence report shows that the poor have a NEGATIVE income and property tax rate because they receive earned income credits and property tax refunds. BUT THIS IS NOT COUNTED AS INCOME IN THE REPORT.

    Another example, I have found that in this "studies" calculation of the amount of sales tax that these low income people pay that this amount would be equal to 80% of their total income (using the highest income level for the quintile). In Minnesota "necessities" are like food, clothing, health care, and shelter are not subject to sales tax. Only things that are truly disposable are. THis means that according to their own calculation that the poor are spending 80% of their income as totally disposable income. If my income was computed the same way, i.e. drop all of my taxes I pay (my LARGEST expense by far), my housing cost, food, and savings my income tax "burden" would be enourmous.

    Look the study up. It is just an example of the misinformation out there.

  • Methinks

    Mark,

    Do you mean 80% of their income is subject to the sales tax because they spend the vast majority of their income or that 80% of their income is paid out in sales tax?

  • Dr. T

    We are crazy. We decided some time ago that a safety net for the non-working poor was not enough, so we put a thick pad on the net. Then we added a comfy quilt, a down pillow, a big color TV hooked up to cable, frozen dinners, etc. The average person on welfare lives far better than our soldiers on base. The average person on welfare lives better than college students staying in dormitories.

    Left-wingers keep demanding more for the non-working poor. I say treat them like soldiers: they should live in barracks, eat at a mess hall, share communal bathrooms, and undergo job training and (if necessary) daily living training. This is a safety net plus a way to move up from the safety net. Nothing more should be given.

    The working poor are exactly that. If they cannot afford the bare necessities and cannot get help from relatives or friends, then the government can provide temporary assistance (as a last resort, not a first resort).

    We need to eliminate, as much as possible, the welfare culture. Progress was made during the Clinton years (yes, he get's credit for signing the bill that was passed by a Republican Congress), but we have far to go. After the welfare culture is crushed, we can tackle the middle class entitlement culture.

  • Michael

    Methinks,

    What Mark seems to be saying is that when "experts" calculate the tax rate of the poor, it's only based on cash they earn. Say they earn $1,000 and pay $100 in taxes, that's a 10% tax rate. But say their housing and food welfare is $9,000 so if you were to add the $9,000 benefit with the $1,000 cash you'd get $10,000 but the tax is still $100. So the real tax rate is 1%. The idea behind the "experts" number game is to make it look like the poor are taxed at a higher rate than the rich.

  • The other coyote

    Oddly, the graph and study match my career.

    My parents ditched me as a "dependent" in 1987, when I was making enough money working in the summers between semesters that I was paying real taxes. By filing my own return, I got taxed at the same rate as the poorest of the poor. Of course, I was living in a dorm or with mom and dad, so calling me "poor" is a little ridiculous - even though on paper, I was a household of one living below the poverty line. Add to that how many of my school-year and summer jobs were "cash" jobs, like cocktail waitressing, where I might walk out with $600 in cash on a Saturday night but report about 1/4 of that. Then I graduated from college, got a low paying, entry level job, worked for a year, went to grad school, made OK money in the summers, then got a federal clerkship (doesn't pay well), went to a small firm, and slowly worked my way up. Since 1994, my income has risen dramatically virtually every year. Then I got married, and actually thought of getting divorced when I saw how much we'd pay in taxes as a married couple. Then I had a baby, worked part time, got the baby into elementary school, and went back to work full time. Along the way the husband's career has experienced ups and downs; he's making $30k less now than he was in 2006. It's ridiculous to think that people never move from one quintile to another.

    I'll throw you one more. My sister is making $50,000 a year on an LTD policy from her last employer, and not one bit of it is taxable because she paid the premiums pre-tax [she has MS and goes through unpredictable periods of blindness, making it impossible to work at her old job]. So they live in the "poverty" level, as defined by these studies, because they only pay taxes on her husband's $25,000 TA position (he's a perpetual grad student) and they are a family of 3.

  • HS

    I also do not believe immigration only brings unskilled people. Einstein was an immigrant as well as Pulitzer. Actually, we all can trace our family back to immigrants. Anyways, I am a believer that change happens from the outside. Just as someone mentioned in a different topic (Asians the new Blacks), a broad and diverse base of experience is the best for decision making. I also think it reduces complacency because a lot these people gave up everything for a better way of life -- for them and their children.

    A personal example -- my dad worked his way from cleaning and mowing the lawn. His hard work exposed complacent ways of life. He ignored others saying how he makes them look bad. Consequently, they no longer work there and he was given the opportunity to learn. The small company made it through the 80’s. It brought tears to my eyes when, in his final years fighting cancer, when 18 of his former apprentices, every year after he was diagnosed, pitched in to give him a Christmas “bonus” – no small amount.

    I agree that a lucrative safety nets decreases incentive. For example, I have friends who cannot find a job much more than their benefits so they wait. (They'll work when it runs out obviously.) But it bothers me that people equate "productivity" equaling more money. Work is work and one can only work so much because there is only 24 hours in a day. It’s just some things are more in demand and/or have high leverage. There are some high skilled jobs that don’t pay well. For example, I consider teaching a skilled job but until recently, was no paid very well. Yes, on the flip side, there are some people that do not work.