There is no question that the U.S. has experienced tremendous economic growth since World War II. Increased productivity, innovations in technology, and globalization have all heightened prosperity. But who benefits from this new wealth? Does economic prosperity merely help the rich get richer, or do those in the middle- and lower-classes reap rewards as well?
Are the Poor Staying Poor?
Many people assume that rich individuals not only get richer during periods of economic expansion, but that they stay in the upper-rungs of the income ladder for many years or permanently. But the evidence shows an extraordinary degree of income mobility among the very wealthy. For instance, according to data from the Internal Revenue Service:
More than 2,218 taxpayers were on the list of the 400 richest Americans profiled each year in Forbes magazine at some point between 1995 and 2003.
Three-fourths of those 2,218 made the cut for only one year.
87 percent were on the list for two years or less, and less than 1 percent made the cut every year.
Of course, wealth and poverty are never static. Americans of all classes often move up and down the economic ladder depending on their personal circumstances and the state of the economy at a given moment:
After one year, about one-third of workers in the bottom income quintile move to a higher one; about one-quarter of those in the top quintile move to a lower one.
Only 29 percent of workers remain in the same income quintile after 15 years.
On average, individuals can expect to move from the 20 th percentile of the earnings distribution at the beginning of their career to about the 60 th percentile during their peak earning years.
What is more interesting is that economic mobility increases with each generation. For instance:
Less than one third (31 percent) of children are in the same income quintile as their parents.
Income differences between high and low income earners tend to disappear by the third generation, on average.
Policy Solutions1
Though the evidence clearly points to the fact that poor individuals and families tend to move up the economic ladder over time, there are certainly public policy solutions that can speed up that transition.
First and foremost are education and job skills. Reducing inequalities in the educational system will, in turn, reduce income inequality by helping low-income students become more qualified for higher-paying and more skilled jobs. Research shows that education can overcome differences in parental income and can increase a child's likelihood of moving his way up the income ladder over time. One way to reduce educational inequity is to allow school choice for parents and students. The competition that results from choice can raise school productivity and student achievement.
Another public policy option to reduce income inequality is to continue reforming welfare so that work-even low-income work-is made more attractive to low-skill individuals. People who rely primarily on government programs for their livelihood have less of an incentive to engage in job training that will vault them up the income scale.
Labor policies, too, have an impact on whether or not low-income workers move up to higher income brackets. The minimum wage, for example, limits employment opportunities for low-skilled workers by forcing them to increase their earning power before being able to get a job. Until a worker can increase his productivity (by on-the-job training, for example), the minimum wage will not help him increase his earning potential.
Occupational licensing laws also hurt low-income workers' chances of improving their economic situation by limiting the number of workers who can enter a given industry, like construction. Punitive regulations (like, for example, a $10,000 fee required to own and operate a taxicab) make it next to impossible for low-income workers to start their own small businesses.
Finally, the tax system can be reformed to encourage personal savings. 80 percent of the Forbes400 richest Americans in 1994 earned, rather than inherited, their wealth, so why are low-income workers tacitly discouraged from saving and investing their money? Individual Retirement Accounts (IRAs) are one example of how any worker can save his income and build up wealth for retirement.
Contributing to Roth IRAs is guaranteed to save taxes over their lifetime.
Thanks to the new credit, these savings can be substantial for the lowest-income households.
However, despite the credit, the tax gains remain meager for most low- and moderate-income households compared to those available to the rich from tax-deferred saving in general.
Earned Income Tax Credit
Another way to help the poor is the application of the Earned Income Tax Credit (EITC). An analysis of IRS data on low-income working families who received EITC between tax years 2000 and 2003 reveals that:2
The number of taxpayers receiving the EITC rose to 21.4 million in 2003, up 14 percent from 2000, and changing economic conditions helped fuel a rise in the proportion of all taxpayers receiving the EITC, from 15 percent to 17 percent.
In 2003, the average EITC recipient earned a credit of $1,788, and EITC dollars accounted for 68 percent of recipients' net tax refunds.
The proportion of EITC recipients who filed their returns through paid tax preparers increased from 65 percent in 2000 to 71 percent in 2003.
Fewer than 8 percent of EITC recipients with qualifying children in 2003 received the Child and Dependent Care Tax Credit (CDCTC) to offset their child care costs.
Although the magnitude of these trends varied among U.S. cities and suburbs, the broader picture emerging from 2000 to 2003 points to three opportunities for policymakers to assist low-income working families: preserving and expanding the EITC at the federal and state levels, increasing the still-limited reach of volunteer income tax preparation programs and making the CDCTC refundable to help low-income taxpayers pay for quality child care.
Conclusion
Economic growth and productivity increases make all workers wealthier over time. There is a large degree of income mobility in American society, with families moving up and down (though mostly up) the income ladder over time. Thus, while the poor generally do not stay poor for long stretches of time, there are certainly ways in which the government can remove barriers to more lucrative job opportunities, allowing low-income, low-skilled workers to move into the middle class.
Jagadeesh Gokhale and Laurence J. Kotlikoff, "Tax-Favored Savings Accounts: Who Gains? Who Loses?" NCPA Policy Report, no. 249, January 2002. http://www.ncpa.org/pub/st/st249/s249.pdf
Are the Poor Staying Poor?
The Rich Getting Richer (and Poorer)
There is no question that the U.S. has experienced tremendous economic growth since World War II. Increased productivity, innovations in technology, and globalization have all heightened prosperity. But who benefits from this new wealth? Does economic prosperity merely help the rich get richer, or do those in the middle- and lower-classes reap rewards as well?
Are the Poor Staying Poor?
Many people assume that rich individuals not only get richer during periods of economic expansion, but that they stay in the upper-rungs of the income ladder for many years or permanently. But the evidence shows an extraordinary degree of income mobility among the very wealthy. For instance, according to data from the Internal Revenue Service:
Of course, wealth and poverty are never static. Americans of all classes often move up and down the economic ladder depending on their personal circumstances and the state of the economy at a given moment:
What is more interesting is that economic mobility increases with each generation. For instance:
Policy Solutions1
Though the evidence clearly points to the fact that poor individuals and families tend to move up the economic ladder over time, there are certainly public policy solutions that can speed up that transition.
First and foremost are education and job skills. Reducing inequalities in the educational system will, in turn, reduce income inequality by helping low-income students become more qualified for higher-paying and more skilled jobs. Research shows that education can overcome differences in parental income and can increase a child's likelihood of moving his way up the income ladder over time. One way to reduce educational inequity is to allow school choice for parents and students. The competition that results from choice can raise school productivity and student achievement.
Another public policy option to reduce income inequality is to continue reforming welfare so that work-even low-income work-is made more attractive to low-skill individuals. People who rely primarily on government programs for their livelihood have less of an incentive to engage in job training that will vault them up the income scale.
Labor policies, too, have an impact on whether or not low-income workers move up to higher income brackets. The minimum wage, for example, limits employment opportunities for low-skilled workers by forcing them to increase their earning power before being able to get a job. Until a worker can increase his productivity (by on-the-job training, for example), the minimum wage will not help him increase his earning potential.
Occupational licensing laws also hurt low-income workers' chances of improving their economic situation by limiting the number of workers who can enter a given industry, like construction. Punitive regulations (like, for example, a $10,000 fee required to own and operate a taxicab) make it next to impossible for low-income workers to start their own small businesses.
Finally, the tax system can be reformed to encourage personal savings. 80 percent of the Forbes400 richest Americans in 1994 earned, rather than inherited, their wealth, so why are low-income workers tacitly discouraged from saving and investing their money? Individual Retirement Accounts (IRAs) are one example of how any worker can save his income and build up wealth for retirement.
Earned Income Tax Credit
Another way to help the poor is the application of the Earned Income Tax Credit (EITC). An analysis of IRS data on low-income working families who received EITC between tax years 2000 and 2003 reveals that:2
Although the magnitude of these trends varied among U.S. cities and suburbs, the broader picture emerging from 2000 to 2003 points to three opportunities for policymakers to assist low-income working families: preserving and expanding the EITC at the federal and state levels, increasing the still-limited reach of volunteer income tax preparation programs and making the CDCTC refundable to help low-income taxpayers pay for quality child care.
Conclusion
Economic growth and productivity increases make all workers wealthier over time. There is a large degree of income mobility in American society, with families moving up and down (though mostly up) the income ladder over time. Thus, while the poor generally do not stay poor for long stretches of time, there are certainly ways in which the government can remove barriers to more lucrative job opportunities, allowing low-income, low-skilled workers to move into the middle class.