Forget Everything You've Heard in the Media About Income Inequality and Income Mobility

Here is the link to the full Treasury study "Income Mobility in the U.S. From 1996 TO 2005" and here is an excerpt:

Using three different measures of income mobility that track changes in the incomes of a large sample of individual taxpayers over time, this study presents new evidence on income mobility over the decade from 1996 through 2005. Key findings include:

• There is considerable income mobility of individuals in the U.S. economy over the 1996 through 2005 period. More than half of taxpayers moved to a different income quintile between 1996 and 2005. About half of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

• Median incomes of taxpayers in the sample increased by 24% after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Further, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. The median inflation-adjusted incomes of the taxpayers who were in the very highest income groups in 1996 declined by 2005.

• The composition of the very top income groups changes dramatically over time. Less than half (40-43% depending on the measure) of those in the top 1% in 1996 were still in the top 1% in 2005. Only about 25% of the individuals in the top 1/100th percent in 1996 remained in the top 1/100th percent in 2005.

• The degree of relative income mobility among income groups over the 1996 to 2005 period is very similar to that over the prior decade (1987 to 1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility has neither increased nor decreased over the past 20 years.

In other words, almost everything we hear in the media about increasing income inequality, the disappearing middle class, the rich getting richer and the poor getting poorer, and the lack of income mobility is either flawed, deficient, incorrect, incomplete or wrong. The data show that:

1. There is significant income mobility up and down the income quintiles over longer periods of time, e.g. 1996-2005. Many of today's poor are tomorrow's rich, and many of today's rich are tomorrow's middle class or poor. The richest quintile is not a private club closed to new members, but a shifting, dynamic quintile composed of an ever-changing group of different individuals from year to year. Consider that 75% of the individuals in the richest group in 1996, the top 1/100th percent, moved down into a lower income group by 2005, making room for a completely different group of individuals in that super-rich category.

This is exactly the shifting pattern of quintile compositions that economic historian Joseph Schumpeter had in mind when he compared income distribution to a hotel where some rooms are luxurious, and others are small and shabby. The rooms are always occupied, but by a shifting, dynamic changing pattern of different people from day to day, or year to year. (Note: this paragraph is paraphrased.)

2. Real incomes are not stagnant, and the middle class is not disappearing. The real incomes of 2/3 of all taxpayers increased from 1996-2005.

3. The rich are not getting richer, and the poor are not getting poorer. The median incomes of those in the lowest income groups in 1995 increased more in percentage terms by 2005 than the median incomes of those in the higher income groups.