As we listen to President Obama, Occupy Wall Street, and much of the mainstream media working themselves into a lather over inequality in America, one thinks of Harrison Bergeron, the 1961 short story by Kurt Vonnegut that posited a society based on perfect equality, "not only equal before God and the law ... equal every which way." The government employed a "Handicapper General" to ensure that no one was smarter, more athletic, or more productive than anyone else. Beautiful people were forced to wear masks, athletic people had to carry weights, and intelligent people wore radios in their ears to interrupt their thoughts with loud noises.
Yet for all the sound and fury — and beating drums in Zuccotti Park — almost everything that people presume about inequality in America is wrong.
For example, nearly all reporting on income inequality in America has suggested that the incomes of the rich have been rising, while incomes for the rest of us have been stagnant or even declining. But that may represent a significant misreading of the data.
Most studies of inequality, including the recent widely reported study by the Congressional Budget Office, rely on IRS-reported taxable income. But, as studies by the Cato Institute's Alan Reynolds and others show, reports of skyrocketing incomes among the top 1 percent of earners may be distorted by changes in the tax code that have resulted in more wealth being reported as taxable income. These tax changes caused businesses to switch from filing under the corporate tax system to filing as individuals, and executives to switch from accepting stock options taxed as capital gains to nonqualified stock options taxed as salaries. Simultaneously, the reductions in income-tax rates in 1986 caused much previously unreported income to show up on tax returns.
At the same time, incomes among lower- and middle-income workers have been shifting from cash wages to non-cash benefits such as health insurance and pensions. These non-cash benefits frequently do not show up as taxable income even though they have value to the worker. In fact, a recent study by Mark Warshawsky of the Social Security Advisory Board suggests that nearly all of the recent increase in earnings inequality "can be explained by the rapid increase in the cost of health insurance employee benefits, and that therefore [there] has not been as significant increase, if any, in inequality of compensation."