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In effect, a big chunk of income for the wealthy used to be hidden not from the tax authorities but from the policymakers who worry about the distribution of income. Subsequent changes in the tax laws have since encouraged people to report this income as personal rather than corporate income. Their incomes haven’t really changed; it just looks to policymakers like they have. The third factor we need to account for is the difference in consumption bundles of those near the top of the income distribution and those near the bottom. Read more

Notwithstanding the data just cited, several forces have either increased income inequality in the United States or given the appearance of such an increase, so it is best to be clear about these. Consider first that a rising proportion of the population is far above the poverty line. Read more

It is also worth noting that some, perhaps many, of the departures from the labor force by low-skill individuals may actually be prompted by certain government programs. We refer here to a portion of the Social Security program that has expanded dramatically over the past 20 years. It involves disability payments.
Originally established in 1956 as a program to help individuals under age 65 who are truly disabled, Social Security Disability Insurance (SSDI) has become the federal government’s second fastest growing program (after Medicare). The real value of benefits has steadily risen as the Social Security Administration (SSA) gradually made it easier for individuals to meet the legal criteria for “disabled” status. Read more