I recently read an interesting article about income inequality. I’m glad I did because it does make me feel a little better about this topic. Here’s a summary of what I found out.
Recent headlines have been saying that U.S. income inequality has reached a 50-year high, based on the Census Bureau’s latest report on Income and Poverty in the US. It makes sense when you look at CEO’s pay compared to the average worker: they make, on average, 287 times what the average worker makes. Some make much higher. For example, Gap’s CEO makes 3,566 times what their average salary is over there in the mall.
At first blush, this sounds absolutely horrible. But, when you dig a little bit deeper into how they come up with these numbers, the disparity isn’t as bad as you think.
The headline numbers that you are reading are published by the Census Bureau. The BIG problem with these numbers is that they don’t account for benefits, such as Medicare/Medicaid, food stamps, subsidized housing, etc. There are 95 of these federal programs, along with dozens of state and local programs that need to be included in the calculations to have a true comparison. The other major omission in their calculations is that they don’t account for taxes. That’s nuts. Especially when the top 20% of earners pay 75% of all the taxes in the US.
To summarize, the low earners receive almost all of the benefits of federal and state programs and the high earners pay almost all of the taxes. This adds to the low earners’ net income and reduces the high earners’ net income.
So, it is obvious that they are way overstating this differential. In fact, by including benefits and taxes, the actual income equality between the top 20% and the bottom 20% goes from 60 to 1 all the way down to 3.8 to 1.
Don’t get me wrong, we still have a huge gap between the top tier and bottom tier earners when you look at straight, gross earnings. But it is disingenuous to publish these numbers without factoring in taxes and benefits in order to have a beneficial discussion.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
