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Permanent Inequality Rising Over Past Two Decades

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A Spring 2013 BPEA paper by Vasia Panousi, Ivan Vidangos, Shanti Ramnath, Jason DeBacker and Bradley Heim


Disadvantaged Becoming Worse Off Long-term; Tax System Has Helped But Not Significantly

Income inequality in the US has increased in recent decades, and this increase is of a permanent nature, according to a new paper presented today at the Spring 2013 Conference on the Brookings Papers on Economic Activity (BPEA).

In “Rising Inequality: Transitory or Permanent: New Evidence from a Panel of U.S. Tax Returns” …  [the authors] use new data to closely examine inequality, finding an increase in “permanent inequality” — the advantaged becoming permanently better-off, while the disadvantaged becoming permanently worse-off. The paper has important public policy implications because rising income inequality will lead to greater disparity in families’ well-being that is unlikely to reverse, whereas “transitory inequality” or year-to-year income variability would imply greater income mobility—those who fare worse today might be able to do better in later years. The authors are among the first to examine various measures of income in great detail, including earnings from work activities as well as broader measures of family resources such as total household income. [SNIP]

Looking at the impact of tax policy on inequality, the paper finds that although the U.S. federal tax system is indeed progressive in that it has provided some help in mitigating the increase in income inequality over the sample period, it has, however, not significantly altered the broadly increasing inequality trend. All told, the results suggest that rising income inequality will likely lead to greater disparity in families’ well-being and reduce social welfare in the long-run.


Rising Inequality: Transitory or Permanent?

New Evidence from a Panel of U.S. Tax Returns

Click to access 2013a_panousi.pdf


We use a new, large, and confidential panel of tax returns to study the permanent versus-transitory nature of rising inequality in individual male labor earnings and in total household income, both before and after taxes, in the United States over the period 1987-2009. We conduct our analysis using a wide array of statistical decomposition methods that allow for various flexible ways of characterizing permanent and transitory income components. For male labor earnings, we find that the entire increase in the cross-sectional inequality over our sample period was permanent, that is, it reflected increases in the dispersion of the permanent component of earnings. For total household income, the large increase in inequality over our sample period was predominantly, though not entirely, permanent. For this broader income category, both the permanent and the transitory parts of the cross-sectional variance increased, but the permanent variance contributed the bulk of the increase in the total. Furthermore, the increase in the transitory component reflected an increase in the transitory variance of spousal labor earnings and investment income. We also show that the tax system partially mitigated the increase in income inequality, but not sufficiently to alter its broadly increasing trend over the 1987-2009 period.



  1. DataHeart says:

    Creation of an economic caste system is the current policy position of the United States Congress. Growing wealth disparity and shrinking mobility is the combination that is bringing us there. This is the inevitable conclusion from which a full and fair minded assessment of our economic laws and policies leads. It may not be the intent of those representing us, but it is our effective trajectory.

    Income inequality is not just growing, it’s growing permanent. Those who argue that the most successful earn their greater rewards have an outdated view of our economic mobility. Study after study have found that mobility is shrinking. For the poor it has almost disappeared. Economically comfortable conservatives are apt to blame the poor for their lot, claiming they are lazy or less enterprising. The truth is far more self-incriminating for those who make such claims. When they look out their window at the gardeners trimming their hedges and laborers landscaping the neighbors yard they are looking at what is statistically the American middle class. Do these folks look lazy?

  2. avwalters says:

    I read it, see it, and in some ways, know it. Tax plays a part of it, but the increasing corporatization of our society, given over to multinational corporations who use their power to keep taxes low, to eliminate the leveling impact of estate taxes on the uber-wealthy, to keep labor costs low and manipulate medical availability, is the death knell of a meaningful middle class.

  3. DataHeart says:

    Agreed, and would add 35 + years of wage suppression to your list.

  4. TamrahJo says:

    Oh – thank you for confirming my beliefs without me having to read the whole report – I once tried to wade through the entire proposed US budget for year 2010 – I got seasick by page 3 and decided I’d rather write a blog post full of wild conjecture and unsubstantiated claims – – still got the point across without me having to read that horrendous document – –

    I wonder how many elected officials have ever read the whole thing?

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