From The Atlantic by Derek Thomson, The Most Important Graphs from 2011, 12/21/11

This graph shows how the richest 1% have take a larger share of the economy in the last 35 years:

… or does it?

This graph does consider the effect after taxes and transfer payments, but…

  1. Why does it begin in 1979? The Reagan tax reform caused the income discrepancy to widen for two reasons. First the control of inflation caused a transfer of assets from tangible to investment.  During the 1970’s many investors moved assets into tangible assets like real estate and gold to benefit from inflation. Tangible assets were often not reported. When they moved their assets to security investments that were recorded it appeared to be a growth in investment income when in fact it was really a transfer from one asset to another. Secondly Reagan changed the tax code in 1987 reducing tax rates and encouraging subchapter C corporations to convert to sub -S corporations.  Unlike a C-corp which filed taxes as a a corporate entity, a sub -S reported its income on PERSONAL tax returns.  This shift in assets from corporate to personal returns also inflated the growth in the wealth of the upper income.  The effects of these two changes was short lived. It could be that most of the growth in the wealth of the upper income all occurred in the 1980’s as a result of these two non recurring events.
  2. Why does it end in 2007?  Is it a coincidence that this picture ended just before the economic collapse that had a much larger impact of the wealthy?  There was a dramatic drop in the wealth of the upper quintile in the last few years.    How different would this graph have looked if it began in 1990 and ended in 2010?  It can be easy to achieve the outcome you desire by selecting the beginning and ending periods to accentuate the picture you wish to paint.
  3. This chart shows income as a percent of the total. But this does not mean that the actual dollars in income of the lower quintiles did not also grow.  It is possible that the upper quintile achieved a larger share of a larger pie, and that all groups showed an increase in income.
  4. Measurements such as this do not include improvements in living standards at all income levels.
  5. Measurements such as this do not consider what drives these results. A better measurement may be the difference in income per hour worked.  Other wise we will be comparing the income of one who works with one who does not. Or we may be comparing the income of one who works 70 hours a week with one who works 30 hours a week.

The point is to be very skeptical of the statistics used to push political agendas.  A part of the truth can be more misleading than all of a lie, especially in this debate. For more information on how the statistics can be intentionally misleading read Income and Wealth by Alan Reynolds.  You can search several postings from this book at the search function in the upper right hand portion of this blog.