On August 30, 2005, the Census Bureau reported
that the poverty rate was essentially unchanged in 2004 and that
the level of income inequality was unchanged, as well.
Still, expect the familiar refrain that the "rich are getting
richer" to be echoed once again. It is important to understand what
the Census numbers on poverty and income inequality really say and
to draw the correct conclusion from them. While the report
overstates both income inequality and poverty, the numbers do show
that Americans would benefit from expanded economic opportunities.
Pro-growth policies, such as a less distortionary tax code, are the
way to achieve this end.
The poverty rate
increased to 12.7 percent in 2004, up slightly from the 12.5
percent reported in 2003. While a rise in the poverty rate is not a
good sign, there are a variety of positive indicators in the latest
rose in one region of the country, the Midwest. Poverty rates in
the West, South, and North Central regions were unchanged.
rose for white (non-Hispanic) adults, and not for children, the
elderly, or minorities. The poverty rate for Asians dropped by a
full two percentage points.
decreased among the elderly, from 10.2 to 9.8 percent.
In short, the rise
in poverty occurred almost exclusively among working age adults.
This points the way to improvement: more pro-growth policies that
produce more jobs, lowering the unemployment rate and poverty in
America. Between late 2001 and early 2004, the unemployment rate
fluctuated between 5.7 percent and 6.3 percent nationwide. Only in
the past year-after the full force of the President's pro-growth
2003 tax cuts had been felt-has there been a persistent decrease in
the unemployment rate, which now stands at 5.0 percent.
should resist calls for increased government social spending.
Welfare reform clearly demonstrated that greater economic
opportunity comes from increased work and economic independence,
not from generous governmental programs. If the current positive
employment numbers persist for the remainder of the year, then the
2005 poverty rate will likely come in below the 2004 rate.
numbers, as the Census Bureau currently presents them, have a
variety of flaws that limit their usefulness. The poverty rate is
determined by the money income definition, which excludes the
variety of in-kind, non-cash benefits, such as Medicare, Medicaid, food stamps, and other
forms of assistance. The Census figures also do not include taxes
or tax payments like the Earned Income Tax Credit (EITC). If
taxes were subtracted from income and non-cash benefits were added
in, the poverty rate would be more than two percentage points lower
than reported, based on historical experience.
An example may
help to illustrate how this works. A single parent who earns
$11,000 per year and has two children would be considered poor by
Census standards. However, that family would receive more than
$4,000 under the EITC, raising its income sufficiently to clear the
Census definition of poverty.
Income inequality is an especially egregious
example of bad data informing public policy. Again, the Census
Bureau considers only money income in its inequality calculations
and does not take into consideration the effects of taxation.
Because the United States has a progressive tax structure,
low-income individuals pay few taxes, while high-income individuals
pay most of the individual income taxes in America.
Thus, Census reported that the top quintile
earned 50.1 percent of money income in 2004, slightly above its
49.8 percent take in 2003.
The share of income going to the bottom two quintiles was unchanged
at 3.4 percent and 8.7 percent, respectively. However, if taxes
were included in these calculations, the results would show much
less income inequality in the United States.
Another major problem with the Census numbers
is that the Census Bureau bases its quintile statistics on
households instead of individuals. Many households in the bottom
quintile are single-parent households or single-person units. In
contrast, households in the upper quintile are generally larger.
Earlier work shows that the top quintile of households may account
for almost a quarter of the population, compared to only fifteen
percent in the bottom quintile.
Thus, households in the upper quintile contain
more earners than households in the lower quintile. Census data
show that the level of income inequality is partly explained by the
difference in hours of work between the different quintiles. The
top two quintiles, for example, account for well over half of all
work in the United States.
It is not surprising that the level of income in the top two
quintiles reflects the preponderance of hours worked.
While the annual
income and poverty report provides good information, it is limited
in its usefulness. In particular, the report overstates both income
inequality and poverty in America. Policymakers would therefore be
wise to take the report's findings with a grain of salt.
should, however, continue to enact pro-growth policies that expand
the economic opportunities of Americans rather than more social
Kirk A. Johnson,
Ph.D., is Senior Policy Analyst, and Rea S. Hederman, Jr., is
Senior Policy Analyst, in the Center for Data Analysis at The