The dynamic U.S. economy is characterized by an
extraordinary degree of income mobility that has been all but
ignored in the recent debate on reducing federal income tax rates
and phasing out the death (estate) tax. Opponents of tax relief are
criticizing commonsense reforms because they claim that "only the
rich" will benefit. Yet the notion that low-income or high-income
groups are composed mostly of the same people over time is an
illusion.
The
comparison of average incomes and taxes paid by groups would be
meaningful only if America were a caste society in which the people
comprising one group remained constant over time. Most Americans,
however, understand that family incomes change frequently, and the
research on income mobility reveals that most family incomes
increase significantly over time.
This
is one reason why Americans with modest incomes tend to resist
"soak the rich" class-warfare arguments: They hope to be rich
themselves one day. Policymakers should ignore this class-warfare
rhetoric and redesign America's tax code so that its barriers to
upward mobility are reduced.
PATTERNS OF INCOME MOBILITY
Many
academic studies have found remarkably consistent results that
suggest there is substantial income mobility in the United
States.
For example:
-
A 1992 Treasury Department study showed
that between 1979 and 1988, 86 percent of those in the bottom
income quintile moved to a higher quintile, and 35 percent in the
top income quintile moved to a lower quintile.
-
A 1995 Federal Reserve Bank of Dallas
report showed that almost three-fourths of those in the bottom
quintile in 1975 were in a higher quintile by 1991, and almost 40
percent in the top quintile moved down to a lower quintile over the
same period.
-
A 1996 Urban Institute study showed that
large numbers of Americans move into a new income quintile, with
estimates ranging from 25 percent to 40 percent in a single year.
The same study found even higher mobility rates over longer
periods: about 45 percent over five years and 60 percent over
9-year and 17-year periods.
-
In 1998, the Census Bureau reported that,
on average, over 41 percent of Americans increased their
inflation-adjusted income by 5 percent or more per year from 1984
to 1994.
The primary reasons for changes in income from year to year were
changes in marital status, changes in the number of workers in the
household, and moving into or out of full-time, year-round
employment.
- A 2000 Economic Policy Institute study
showed that almost 60 percent of Americans in the lowest income
quintile in 1969 were in a higher quintile in 1996, and over 61
percent in the highest income quintile had moved down into a lower
income quintile during the same period.
The
direction of income mobility is also important. The upward movement
of workers in the second-lowest and middle-income quintiles is
larger than the downward movement. From 1969 to 1994, the income of
53 percent of workers in the second-lowest income quintile had
increased enough to move them up into a higher income quintile, and
38.7 percent of workers in the middle quintile had moved up
compared to 37.9 who moved down.
CONCLUSION
Much
of the debate and political rhetoric on tax relief have focused on
how much income the top one-fifth or 1 percent of families would
receive versus the bottom one-fifth and other fifths. Yet this
approach is statistically meaningless because the mix of
individuals and families who make up the various income groups
changes constantly.
The
fact is that the U.S. economy, while not without its problems,
remains dynamic, open, and productive enough to enable Americans to
rise as far and as fast as their dreams, hard work, and
perseverance will take them. What is needed is commonsense tax
reform that reduces the burden of excess taxation for all
Americans.
D. Mark Wilson was a
Research Fellow in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.
The
direction of income mobility is also important. The upward movement
of workers in the second-lowest and middle-income quintiles is
larger than the downward movement. From 1969 to 1994, the income of
53 percent of workers in the second-lowest income quintile had
increased enough to move them up into a higher income quintile, and
38.7 percent of workers in the middle quintile had moved up
compared to 37.9 who moved down.
CONCLUSION
Much
of the debate and political rhetoric on tax relief have focused on
how much income the top one-fifth or 1 percent of families would
receive versus the bottom one-fifth and other fifths. Yet this
approach is statistically meaningless because the mix of
individuals and families who make up the various income groups
changes constantly.
The
fact is that the U.S. economy, while not without its problems,
remains dynamic, open, and productive enough to enable Americans to
rise as far and as fast as their dreams, hard work, and
perseverance will take them. What is needed is commonsense tax
reform that reduces the burden of excess taxation for all
Americans.
D. Mark Wilson is a
Research Fellow in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.