The Ladder of Lies, Damn Lies and Statistics--Let Me Count the Ways

 

By Patricia L Johnson  and Richard E Walrath

 

 

“income mobility in the U.S. from 1996 to 2005 – report of the department of the treasury – november 13, 2007” is a 22-page report filled with enough tables to fill a book. 

 

On paper, it appears the Treasury Department has managed to analyze income mobility inside out and backwards to come to the conclusion the poor are jumping up the income quintile ladder by leaps and bounds, while the rich are losing ground.

 

The study concluded there is considerable income mobility of individuals and the degree of mobility is basically unchanged from prior periods.

 

Key findings are:

 

1.      More than half (minimum 55 percent) moved to a different income quintile during the period of time analyzed (1996 – 2005)

2.      Most taxpayers had rising incomes due to economic growth.

3.      After adjusting for inflation, median incomes increased by 24% for all taxpayers.

4.      Real incomes of 2/3 of all taxpayers increased during the 1996-2005 period.

5.      Median incomes of those in lower income groups increased more than median incomes of those in higher income groups.

6.      Less than ˝ (40 percent minimum) in the top 1% in 1996 were still in the top 1% in 2005.

7.      25 percent those in the top 0.01% in 1996 remained in the top 0.01% in 2005.

 

Our initial reaction to this report is, if you start at the bottom there’s only one direction you can go.  If you’re at the top, there’s no more room to go.  What to look for is whether or not the income distribution has changed.  Is it as unequal now, or worse, than it was before?

 

Movin’ on Up, a Wall Street Journal editorial published November 13, 2007 babbles on about how all questions about the disparity between the rich and poor can finally be put to rest with the following statement and data:

 

 “The study, to be released today, is a careful, detailed piece of research by professional economists that avoids political judgments.”

 

U.S. Income Mobility Percentage change in median income from 1996 to 2005, by 1996 income Quintile, in 2005 dollars

 

Income Level

Percent

Lowest

90.5

Second

34.8

Middle

23.3

Fourth

16.6

Highest

10.0

Top 10%

2.9

Top 5%

-6.8

Top 1%

-25.8

All Groups

24.2

 

We have to agree the study was carefully researched.  This administration has a history of tweaking and fine-tuning numbers until they squeal and this report is no exception to the rule.

 

So, how did they do it?  How did they manage to come up with a report that contradicts what is a known fact, that the economic policies put forward by this administration have dramatically increased the wealth of the rich?

 

  1. The 1996 tax return information includes data from late filed returns from both 1997 and 1998, while the 2005 tax return figures do not contain late filed returns.  The significance here is late filed returns are generally far more complex and are filed on behalf of high-income taxpayers.  If you include the high end tax returns in 1996, but leave them out of the 2005 tax return figures, the numbers are obviously distorted.  These late tax returns generally represent 1-2 percent of the total tax returns filed.

 

 

  1. The U.S. Treasury report of November 13, 2007 does not use the same basis for cash income as prior reports prepared by the Census Department, Congressional Budget Office or Treasury Department; therefore accurate comparisons between the reports cannot be made. 

 

A significant addition to the U.S. Treasury report of November 13, 2007 is Social Security benefits.  Following is a listing of what this report is taking into consideration as ‘income’.

 

Cash income is defined to include wages and salaries, tip income, taxable and tax-exempt interest, dividend income, alimony, net income from business (sole proprietorships, partnerships, and S corporations), farm income, net rental income, royalty income, net capital gain or loss in adjusted gross income (AGI), other gain or loss, unemployment compensation, taxable and nontaxable pension and annuity income, Social Security benefits (including the non-taxable portion), and other income included in AGI. Net operating losses carried over from prior years are added back.

 

  1. The Treasury Report states Income is adjusted for inflation using the Consumer Price Index Research Series Using Current Methods (CPI-U-RS) and follows with a table indicating cash income levels for income quintiles.

 

A cursory review of this table basically tells you everything you need to know about this report.  The 1996 income cutoff for the top 1% was $284,603, but increases by $179 thousand dollars for 2005 to $463,615.

 

If you continue to raise the bar on what is considered the top income in this country, of course taxpayers are going to fall into a lower category.  The income level cutoff point for all income quintiles indicated has increased at rates far exceeding inflation.

 

 

 

 

Income Breaks for Population Quintiles for 1996 and 2005 (in 2005 dollars)

 

 

 

Income

Quintile or

Percentage

1996

Income

Cutoff

Amount

 Under

2005

Income

Cutoff

Amount

Under

Bottom

15,326

19,488

Second

15,326

19,488

Middle

25,787

33,120

Median

31,785

41,242

Third

38,881

51,257

Fourth

60,897

83,138

 

 

 

Top 10%

85,387

120,211

Top 5%

116,425

171,856

Top 1%

284,603

463,615

 

Source: IRS, Statistics of Income 1996 and 2005 Individual Income Tax Files.

U.S. Treasury Report, Income Mobility, November 13, 2007

 

Warren Buffet, Chairman and Chief Executive Officer of Berkshire Hathaway, Omaha, NE appeared before the United States Senate Committee on Finance on November 14, 2007. 

 

Although Mr. Buffet appeared as a witness to present his views on the Federal Estate Tax, he also presented an excellent case proving the gap between the super rich and middle class has widened, by comparing the increase in the Forbes 400 list with the median income increase for the average American over a 20 year period of time from 1987 to 2007.

 

He stated that in 1987 it took $220 million to make the Forbes 400 list, while in 2007 it took $1.3 billion to make the list, or a 6-1 increase.  While the total wealth of the listing was $220 billion in 1987, it ballooned to $1.54 trillion in 2007 or a 7-1 increase, basically due to tax law changes benefiting the rich.

 

Buffet then compared the median income of the average American worker - $26,061 in 1987 to $48,201 in 2007 and stated the increase in wages for the average American was almost exactly the same as the increase in the CPI (Consumer Price Index) during that same period.  He further went on to say that while the average American worker has been on a treadmill the super rich have been on a spaceship.

 

Using the CPI inflation formula to calculate you’ll note the current median income is actually higher by about $875.00.

 

$26,061.00 Salary = 2007 Salary x (1987 CPI / 2007 *Est. CPI)

1.816 = $47,326.77 x (113.6/206.3)

 

  • Estimated CPI for 2007 based on change in CPI from 3rd qtr. 2006 to 3rd qtr. 2007 - Base year is chained; 1982-1984 = 100

 

The fact the median income is actually slightly higher than the inflated CPI by $875.00 is a sad state of affairs, due to the fact that increases in food and energy prices are not included in consumer price index calculations.

 

In other words the median income of American workers over the past 20 years has not even kept up with inflation, when food and energy costs are included.

 

© 2007 Patricia L Johnson and Richard E Walrath

 

Patricia L Johnson and Richard E Walrath are co-owners of the Articles and Answers News and Information sites.  Articles and Answers and Articles and Answers 2007