Addressing income inequality – Charles Lane style

When a solution to a problem is proposed it is usually good practice to ask the simple question “What will doing this action accomplish?” Sometimes the answer is “nothing.”

This past week an editorial appeared in the Washington Post by Charles Lane on the subject of income inequality. The auspicious title was “Fixing one driver of inequality may hit close to home for some progressives.” Charles Lane was the author.

In response to proposal to increase the minimum wage and increase taxes on the rich he turns his attention to what he labels “Exhibit A” in government policies that “skew” the income distribution upward. The culprit is the treatment of residential real estate in the tax code via deductions for both the interest payments on home loans and for property taxes. He seems to relish the fact the eliminating these tax benefits would hurt the most in the areas that support President Obama.

Charles Lane throws out some very big and impressive numbers on the cost to the treasury of these deductions. He uses numbers like $70.3 billion, $31.7 billion and $52.5 billion. They are impressive amounts with a total cost of $154.5 Billion. These are annual number. Lane’s point is that the bulk of these deductions help those in the top quintile of the income distribution. Thus eliminating, or curtailing them would reduce income inequality. On that point he is correct.

However when I ask the simple question does it make a material difference the answer is not much.

The Census Bureau regularly releases numbers on income and income inequality. The most recent data is for 2012 in the report “Income, Poverty, and Health Insurance Coverage in the United States: 2012.” Additional data can be found in the income section of the Census Bureau website.

This provides all the data need for a quick back of the envelope calculation. First note that Lane does not claim that the value of all of the deductions accrue to those in the top quintile of the income distribution. But let me make the assumption that they do. This will mean that be eliminating the entirety of these deductions I am overstating the impact the change will have on income inequality. The Census Bureau tables show that in 2012 there were 124,459 thousand households in the United States with a mean income of $71,274. Simple multiplication gives an estimate of aggregate income in the county of $8,871 billion. The Census Bureau report shows that 51.0 percent of this income is taken by the top quintile. That comes to an aggregate income for the top 20 percent of households of $4,524 billion dollars. The tax deductions cost the treasury $155 billion. The cost to the top quintile then is something less than that figure. That is it less than 3.3 percent of their income.

It seems obvious that anything that impacts only about three percent of the income of those in top 20 percent will do very little to reduce income inequality when that group is making over five times those in the second quintile, over three time that of those in the middle quintile and over twice that of in the fourth quintile.

The bottom line is that while there may be good reasons to doing away with the deductions, reducing income inequality is not one of them.