Tuesday, November 20, 2007

What's More Important

The US Treasury recently released a report on income mobility in the US from 1996 to 2005. It found:

• There was considerable income mobility of individuals in the U.S. economy during the 1996 through 2005 period with roughly half of taxpayers who began in the bottom quintile moving up to a higher income group within 10 years.
• About 55 percent of taxpayers moved to a different income quintile within 10 years.
• Among those with the very highest incomes in 1996 – the top 1/100 of 1 percent – only 25 percent remained in this group in 2005. Moreover, the median real income of these taxpayers declined over this period.
• The degree of mobility among income groups is unchanged from the prior decade (1987
through 1996).
• Economic growth resulted in rising incomes for most taxpayers over the period from 1996 to 2005. Median incomes of all taxpayers increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. In addition, the median incomes of those initially in the lower income groups increased more than the median incomes of those initially in the higher income groups.

Most of the reports we see in the media about income distribution concentrate solely on income inequality, but it seems to me that this is much more significant. Any policy enacted to mitigate income inequality, if indeed it needs mitigating, could have adverse consequences on income mobility. Which is worse? To have a large income difference between the top and bottom quintiles? Or for someone in a lower quintile to have no hope of rising to a higher quintile? I believe we should preserve income mobility even if it comes at the expense of income inequality. In other words, opportunity is more important to our economy than assuaging envy or guilt.

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