August 25, 2004

August 25, 2004 | News Releases on Jobs, Jobs and Labor Policy

Census Report Overstates Income Inequity, Analysts say

WASHINGTON, AUG. 25, 2004-In his "Two Americas" stump speech, Democratic vice-presidential hopeful John Edwards speaks of "one America that does the work, another America that reaps the reward. One America that pays the taxes, another America that gets the tax breaks."

But a new analysis of Census Bureau data by The Heritage Foundation finds that the nation's so-called "income gap" is far more narrow than Sen. Edwards-and the Census Bureau itself-would have us believe.

Examining data from the Census Bureau's annual income and poverty report, Senior Research Fellow Robert Rector and Senior Policy Analyst Rea Hederman found that the income ratio between Americans in the top fifth in earnings and those in the bottom fifth is nowhere near the $14.37 to $1 figure cited in the Census Bureau report. The Census Bureau itself, in a less-publicized report that factors in social safety net expenses and other payments, puts the number at $8.62 for Americans at the top for every $1 for those at the bottom.

But even those figures are misleading, Rector and Hederman conclude. The Census Bureau makes its calculations by dividing the population into the five equal groups of households, or quintiles. But wealthier households tend to have more people, which creates a population disparity among the groups. The top quintile includes 25 percent of the population, including many households with multiple wage earners. The bottom fifth includes only 14 percent. "The bottom quintile has less income in part because there are fewer people in it," Rector and Hederman say.

Adjusting for this-assigning one fifth of the population to each quintile-changes the numbers substantially. Instead of earning 49.7 percent of all income, as the Census Bureau's better-publicized report claims, the top fifth earns 39.6 percent. Instead of $14 for every $1 earned by the bottom fifth, top earners take home just $4.21 for every $1 earned by the bottom fifth.

And much of that difference can be explained by inequality in the amount of work performed, according to Rector and Hederman. They cite Census Bureau data that show the top quintile of households in earnings do more than a third of all the paid labor in the country. Yet, the bottom fifth performs just 4.3 percent. If one adjusts the data to have equal numbers of non-elderly adults in all five groups and takes into account hours worked, the income share of the bottom fifth would rise to 12 percent, and the top fifth would earn just $2.91 for every $1 the bottom fifth earns.

As for trends, the top 5 percent of households earned 15.8 percent of total income in 1980 and 21.7 percent in 2002. But most of this increase came in the 1980s and mid-1990s, and the figures have moved little in the last five years.

The top fifth of U.S. households, those with earnings of more than $84,000, pay 82.5 percent of federal income taxes and two thirds of all federal taxes.

"John Edwards is correct in one sense," Rector says. "There is one America that works a lot pays a lot in taxes and another that works less and pays little. However, the reality is the opposite of what he suggests. It is the higher-income families that work a lot and pay nearly all the taxes. Raising taxes on them would be unfair and, by reducing the investments that spark growth, would harm all Americans in the long run."

Rector will discuss his findings Aug. 26 at the Brookings Institution. He is speaking as part of a panel discussion that begins at 2 p.m.

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