How often have you heard the claim that incomes in the United States have been stagnant for “decades”?

The chart below from the Pew Economic Mobility Project shows otherwise.

It is true that the top 20 percent in the United States today earns more than the top 20 percent earned in 1970.  But comparing quintiles across time doesn’t tell us what happens to actual people.

The chart shows what happens when you compare the incomes of parents (1967-71) with those of their children (1995-2002): The children of all earners except those in the top 20 percent saw their incomes improve over those of their parents. The children of earners starting in the bottom 20 percent saw the biggest increase over their parents’ incomes.

This excellent paper The Inequity of the Progressive Income Tax sheds more light on this issue.  The author, Kip Hagopian, writes:

In addition to America’s substantial superiority in gdp per capita (which is a measure of the performance of the economy without regard to how income is distributed), the US. has a much higher standard of living than virtually all of the most advanced European and Asian countries. According to Luxembourg income  study (which uses a very comprehensive measure of income) median disposable personal income in the US. In 2002 was: 19.3 percent higher than Canada; 68 percent higher than Finland; 45 percent higher than Germany; 59 percent higher than Italy; 31 percent higher than Norway (despite its vast oil and gas wealth); 73 percent higher than Sweden; and 31 percent higher than the United Kingdom. It should be noted that the figures for GDP per capita and median income understate America’s advantage because the median age of America’s population (about 36.8 years) is about four years lower than the average of the median ages in Western Europe and almost eight years younger than Japan. Age (a proxy for experience) is one of the most significant contributors to income and is also, therefore, one of the most significant contributors to income inequality. In addition to higher median incomes, Americans have higher median net worths, which add further to the standard of living differential.

Hagopian goes on to say:

Another common claim is that incomes in the U.S.have been stagnant for “decades.” But this claim is at odds with data from the Congressional Budget Office, which uses a measure of household income that, like the Luxembourg measure, is quite comprehensive, taking into account transfer payments, health and retirement benefits, profits from retirement accounts, imputed interest on owner occupied homes, differences in household size, and taxes paid. Using this more meaningful definition of income, from 1983 to 2005 real median household income in the U.S.rose by 35 percent, which can hardly be considered “stagnant.”

Have a look too at the parable at the beginning of the article on tax principles.  It’s brilliant.

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