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Tuesday, April 13, 2010

"Cherry-Picking Income Distribution Statistics"

Justin Wolfers says Greg Mankiw is presenting a misleading picture of the ability of high income households to help with our "fiscal woes":

Cherry-Picking Income Distribution Statistics, by Justin Wolfers: Greg Mankiw is critical of Parade magazine’s “Annual Salary Survey.” It’s a series of pictures of real people, who also ‘fess up to what they earned last year. But this being a glossy magazine, they add in a sample of celebrities. In consequence:

about 14 percent of the people in Parade’s sample earn more than $1 million a year.  In the real world, the actual percentage is about 0.2 percent.

But Greg is concerned that this sends the wrong message:

There is a common perception in some circles that we can solve all our fiscal problems if only we were willing to tax the rich some more. Yet, in reality, there are not enough rich for this to work. By presenting such a skewed cross-section of incomes, Parade inadvertently feeds an all-too-common misperception.

Well, yes and no. If we are interested in thinking about the potential taxes the rich can pay, Mankiw’s 0.2 percent is incredibly misleading. The issue here isn’t how many people are rich, but rather how many dollars are earned by the rich. ...

What proportion of income is earned by the rich?  Let’s turn to Emmanuel Saez’s compilation of income tax statistics. The latest data are for 2007, and for simplicity’s sake we’ll examine the broadest measure of income. The richest 0.5 percent of families all earned more than $632,000, and received 19.3 percent of all income. Or alternatively, we can focus on the richest 0.1 percent of families—who all earned more than $2 million, and collectively earned an average income of $7.1 million. This sliver of the community—the folks Greg worries about—received 12.3 percent of all income.

The lesson? Families earning more than $1 million probably do represent close to 14 percent of total income, and maybe more. By arguing that only 0.2 percent of families are this rich, Mankiw risks distracting his readers from the fact that increasing the taxes paid by the rich can be a big part of the solution to our fiscal woes.

Whether or not the wealthy can shoulder the tax burden alone, they should still pay their share of taxes. Based upon principles such as equal marginal sacrifice, it seems to me that the share ought to be larger than it is.

    Posted by on Tuesday, April 13, 2010 at 11:43 AM in Economics, Income Distribution, Taxes | Permalink  Comments (41)



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