The Durk Pearson & Sandy Shaw®
Life Extension NewsTM
Volume 17 No. 6 • July 2014


On Income Inequality, and Why The Middle Class Is Vanishing

The Gini coefficient that measures income inequality does NOT take into consideration either reduction of that income by progressive income taxes nor increases of that income via receipt of transfer payment benefits either in cash (such as the refundable Earned Income Tax Credit) or in kind (such as food stamps, Medicaid, SCHIP, LIHEAP, Section 8, etc.).

This results in a grossly misleading measure of income inequality. How gross? Take a look at the table below. Note that it is for Mississippi, one of the lowest welfare payment states. Note, too, that this chart is pre-Obamacare, which is hugely redistributive. As you can see, after considering taxes and redistribution, someone earning $60,000 per year has about $3,400 less effective income than someone earning $14,500 per year. The trend toward part time jobs started before Obamacare, though that made the incentives for part time work even stronger than shown in the chart.

The big drop in the percentages of people participating in the work force is not due to aging Baby Boom demographics. The percentage of the 55 and older cohort that is employed has actually increased since 2009. The prime working age participation of the 18–44 and 45–54 year olds has dropped dramatically.

<LEM1407Money-Earned274.gif
(click on thumbnail for full sized image)

Look at the chart.

Between $3,625 income and $14,500 income, your effective marginal tax rate on your additional income, including means tested benefit phaseouts = 43.5%

Between $14,500 income and $30,000 income, your effective marginal tax rate on your additional income, including means tested benefit phaseouts = 167%. In this income range, every additional $1.00 that you earn makes you lose $1.67, making you worse off!

Between $30,000 income and $60,000 income, your effective marginal tax rate on your additional income, including means tested benefit phaseouts = 76.7%. In this income range, for every additional $1.00 that you earn, you get to keep only $0.23! If you have a $30 per hour job, you get to keep only $6.90 of it. Why study? Why work? You racked up a fortune in college debt for $6.90 per hour net income?

Between $14,500 income and $60,000 income, your effective marginal tax rate on your additional income, including means tested benefit phaseouts = 107.5%. In this income range, every additional $1.00 that you earn makes you lose $1.07, making you worse off!

Can you see why there is so much more part time work than full time work, even before Obamacare?

When one’s income becomes sufficiently large, the means tested benefits phaseouts become relatively smaller in their effects, though ones not shown here (such as some personal deductions) continue to phase out at over $100,000 per year income.

Can you see why there is a divergence between upper class and lower class with the middle class disappearing? People respond to incentives. The phaseouts of means tested transfer payment benefits, both in cash and in kind, are making a middle class income less beneficial than a low class income, hence the middle class is vanishing!

The greatest force for the disappearance of the middle class is Demopublican/Republicrat means tested safety nets, yet only “heartless” Tea Party and libertarian “extremists” would repeal them …

This is not going to end well. The taxes to pay for this wealth redistribution come mainly from the shrinking upper middle class; there simply isn’t enough 1 percenters to pay the bill, and their incomes vary far more with economic conditions, going down when the demand for transfer payments is going up. Those who are in the upper middle class and above are working to an older age, but they will eventually be forced to retire by declining health, vigor, and deaths. Then where will the money to redistribute come from?

The income dependent phase-outs of these means tested redistribution programs place a prohibitively high effective marginal tax rate on anyone trying to move from lower class or lower middle class to upper middle class. This move upwards takes decades of full time work. Who would be willing to work for decades with effective marginal tax rates of 167% between $14,500 and $30,000 and 77% between $30,000 and $60,000? (Now even worse due to ObamaCare.)

Getting a college education is a rational attempt (if courses are wisely chosen with the job market in mind) to vault over this high effective marginal tax rate chasm. But this strategy often creates a morass of student debt that takes a decade or more to repay. Moreover, only those a standard deviation or more out on the right hand tail of the IQ bell curve have what takes to profit from even a wisely chosen college education investment.

People of average IQ can make a good living if they learn the right skilled trade, such as welding—if they have the self restraint needed to pass a drug test. Skilled trades aren’t what they used to be, though; many now require an expensive license that takes years to obtain—if your established competitors allow you to ever get it.

Even IQ 85 (one standard deviation below average) people eventually figure out that being on vacation 6–8 months per year beats full time year round work. Note that the table below does not include income from unemployment compensation. In many States, three months of work—even part time—qualify one for months of unemployment compensation. Lots of people have figured out how to work the system.

FREE Subscription

  • You're just getting started! We have published thousands of scientific health articles. Stay updated and maintain your health.

    It's free to your e-mail inbox and you can unsubscribe at any time.
    Loading Indicator